The Option Investor Newsletter Sunday 03-24-2002 Copyright 2001, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 3-22 WE 3-15 WE 3-08 WE 3-01 DOW 10427.67 -179.56 10607.23 + 34.74 10572.49 +203.63 +400.71 Nasdaq 1851.39 - 16.91 1868.30 - 61.37 1929.67 +126.93 + 78.20 S&P-100 580.09 - 11.04 591.13 + 1.29 589.84 + 13.68 + 22.12 S&P-500 1148.70 - 17.46 1166.16 + 1.85 1164.31 + 32.53 + 41.94 W5000 10776.86 -127.83 10904.69 + 14.02 10890.67 +330.66 +380.72 RUT 502.39 + 3.27 499.12 - .73 499.85 + 21.51 + 13.27 TRAN 2877.27 - 74.27 2951.54 - 58.70 3010.24 +113.11 +171.48 VIX 19.62 - 1.15 20.77 - 0.84 21.61 - 0.52 - 2.76 VXN 37.56 - 2.70 40.26 - 1.36 41.62 - 0.32 - 6.63 TRIN 1.12 0.56 0.73 0.74 TICK +647 +855 +927 +1029 Put/Call .66 .64 .62 .94 ****************************************************************** The Winning Streak Ends! by Jim Brown What a difference a week makes! The prior two weeks capped a five week winning streak for the Dow that left it within a handful of points from 10600 at each Friday's close. This week started well with Monday and Tuesday seeing the Dow trade well over 10650 both days as investors expected the Fed to leave rates unchanged and say positive things bout the economic recovery. All of that happened as expected but was quickly followed by more cautionary comments, and fears of an aggressive Fed in the near future. Those fears subsided quickly when they were replaced with even greater fears of a new recession in our future and a flurry of earnings warnings. So many topics and so little space! Leading the big news we will start with the controversy over GE. As the largest company in the Dow it has a major impact in Dow direction. Unfortunately that direction was down after several negative news stories. After trading at a high of $40.55 the stock dropped to a five week low under $37 on Wednesday. Bill Gross, bond fund manager at PIMCO, said he was concerned about their disclosure practices and their heavy debt load. GE sold $11 billion last week and said they could go out for another $50 billion earlier this week. This caused a run on the stock which only slowed after GE announced on Friday that they were reaffirming their 2002 full year earnings and were going to reduce their short term debt going forward. Unfortunately investors did not race back into the stock after the GE comments. The volume was only 30 million shares compared to 56 million on Thursday. The problem it appears is nobody wants it even at $37. If this trend continues then the Dow will have one more anchor to drag. Adding to the Dow's problems was an earnings warning from McDonalds. The company warned on Friday that sales around the world were under pressure for many different reasons including weak economies and mad cow disease. The company said it would miss estimates for the quarter and the year. They were forced to close many restaurants which were under performing. The stock dropped -1.05 for the day and could be under pressure going forward. Another Dow component took a hit and dragged several others with it. An internal memo from HWP said that revenue and profits in the services division was well below plan. The memo said that orders for technology services were "very soft" and called it a "cause for concern." The services division accounted for 17% of the $45 billion in revenue last year. A dramatic drop in this high profit performer could cause HWP to miss estimates substantially. HWP dropped to a low of $17.50 on the news but rebounded to close down only -.35 cents but at a five month low. However, the worry about weak services orders knocked -1.18 off of IBM and will continue to pressure the stock next week. IBM gets more than 20% of its revenue from its services division. Microsoft also suffered from the backlash as weak service orders could equate to weak software sales as well. INTC dropped nearly $1 on the same concerns. The birds of a feather concept works great when the news is good but bad news ripples downward even faster. The Dow problems above paled in significance to the ramifications from the Philadelphia Fed Survey on Thursday. The index headline number was 11.4 and much less than the expected 16. This was the first drop since November and the new orders component was the weakest since December. This brought an immediate wave of warnings that the economic rebound everyone had been bragging about was just the inventory correction process and real demand was simply absent. The double dip scenario crowd took center stage and the markets felt the impact. Historians pointed to the past when almost every prior recession was met with a second dip after the oversold phase was seen. Adding to the worry about another dip was warnings from several companies that they would miss earnings and they saw no recovery in their future. If you think about it this is nothing new. Everybody except maybe the chip makers has been saying "still no visibility" all month but the bulls simply ignored it. Even GE said they saw no recovery in their future when they reaffirmed earnings the first time. Solectron for instance announced earnings inline with already lowered estimates but warned that the next quarter will be lower. The biggest comment was that much of their $4 billion in outstanding orders may get pushed into the end of NEXT YEAR. The contract electronics sector, where chips meet boards and become actual equipment, is still very weak. Reading between the lines would indicate that there are no orders for completed equipment if production is being delayed as much as 18 months. Does this mean the inventory correction orders are already over and companies are expecting another dip before things get better. It would appear so to investors. As I mentioned above the only tech sector still expressing optimism is the chip sector. AMAT announced a 2:1 split on Thursday night and said they still "expect" orders to rise 10-15% in the next quarter. There is no rush to buy chip equipment but with the new .09 micron process for new chips those companies who want to be competitive must step up to the table. Even the oil services sector, which had been on a roll, came up dry on Friday. BHI warned that declining rig counts would impact their earnings and the stock dropped -2.55. Quick on the trigger Salomon Smith Barney downgraded BHI, RDC, NBR, SLB and TDW. The analyst said weak Latin American economies and slowing consumption due to higher oil prices made the sector overpriced by as much as 20%. Where did all the bullishness go? Reality of a possible double dip enhanced price concerns that were already present. Many analysts have been preaching the overpriced market mantra for several weeks and it only intensified after the +1000 point Dow gain in the last five weeks. This is a constant babble and I do not want to place too much emphasis on its credibility. Still, when traders start looking for excuses in times of trouble that is the first one they find. Anyone looking closer than the talking heads on stock TV knows that other factors are more important. First there is that +1000 point gain. Did anyone expect there to be no profit taking? Of course not! Only the hobby traders get caught flat footed after those types of gains. Also, historically speaking, the last five trading days of March have also been rough the last several years. This is a normal cyclical thing, which should be expected. Add in all the warnings and double dip talk and it just becomes more likely. For next week the Dow still looks like it could be under pressure. There was an intraday bottom at 10400 on Friday but it could just be a resting place instead of a bottom. The S&P has the same thing at about 1145 but you would be stressed to call it support. 1850 is performing the same function on the Nasdaq. I would like to stress that these are not support levels but simply areas where some buyers stepped in to snag a few shares at a discount. The name of the game appears to be "dips are for snacking" not buying. Funds are seeing cash come into accounts but they are not rushing out to buy something. According to TrimTabs.com $4.4 billion in new cash flowed into funds for the week ended on Wednesday compared to a whopping $7.6 billion the prior week. In comparison to the past couple months this is a huge inflow. This apparently means consumers saw the Dow about to breakout to a new post attack high and wanted to buy a ticket for the rally. This "headline" buying is part of the problem that is pushing the VIX to new lows. The herd buys the tops and sells the bottoms and considering the $12 billion inflow of cash over the last two weeks you would be hard pressed not to see the trend. The VIX closed under 20 on Friday at 19.62 and the VXN closed near an all time low of 37.56. Does anyone else think it is strange that the volatility indexes fell on a day the markets dropped? This is contrary to the conventional trends. People are simply so sure that the markets are going up that they are not buying puts to protect themselves. This is dangerous complacency in its highest form. What should investors do? I think the answer is clear. The closer we get to April earnings the more earnings warnings we will see. There is a stronger possibility that the markets will move sideways or down instead of up. We have failed so many times at 10635/1175 that traders now want to see if there is a bottom. Once the market is assured there is support nearby then traders will feel better about buying stocks and attempting the breakout again regardless of the possibility of a second economic dip ahead. I revised my entry/exit points last Sunday to 10475/1850/1150 and all of those levels were breached on Thursday. Since the Nasdaq appears to be the index to watch next week I am going to revise my ENTRY point to 1875. If you are not long tech stocks then I would not open new positions until after the Nasdaq trades over Friday's high of 1873. The index closed at 1851 on Friday and could be headed lower. Many tech stocks that rallied on Thursday did so on short covering after the huge Wednesday drop. They rallied right to resistance and collapsed again. I am changing my Dow entry point to 10500 since it failed just below that on Thursday and Friday. We only want to be long the market if the market can take out the prior resistance. The number for the S&P is 1155. Should the markets continue to show weakness I would short the S&P below 1140, the Nasdaq below 1825. (QQQ = 36) Real support for the Nasdaq is not until 1750. (QQQ = 33.50) Above all, regardless of the options you purchase, puts or calls, I would strongly advise buying more time than normal. With the volatility so low the option prices are also low and you can afford to buy that extra time insurance. When the volatility returns you will be richly rewarded as those option prices expand again. The weak before Good Friday is typically flat to down. Fund managers window dress their portfolios the prior week in order to take a long holiday. The first two days after Easter are normally bullish as traders pickup bargains from the prior weeks drop. This would suggest buying the close next Thursday for a quick trading play could be higher odds than usual. I will update that outlook on Tuesday night. Volume next week could be even worse than the 1.2B NYSE, 1.3B Nasdaq on Friday. Any surprise news events could produce some serious market swings. Be prepared. Unfortunately, the "Sell Too Soon" close has been put back on the shelf until later. Until then.... Enter Passively, Exit Aggressively! Jim Brown Editor It is with great pleasure that we announce the addition of Leigh Stevens as Chief Market Strategist at OptionInvestor.com Leigh was working a Cantor Fitzgerald with an office on the 105th floor of the WTC when the attack occurred. Fortunately Leigh was out on leave finishing his new book called "Essential Technical Analysis" at the time and was spared. After that close call Leigh decided to move to Denver and join OptionInvestor. We are pleased and fortunate to have someone as knowledgeable and experienced as Leigh join our staff. Look for his daily input in the Market Monitor and in the pages of Option Investor. Check out his latest contribution here: http://members.OptionInvestor.com/marketwrap/032102_1.asp BIOGRAPHY Leigh Stevens Lstevens@OptionInvestor.com Leigh Stevens began advising a trading and investment clientele in 1982, at the advent of the long-term equities bull market, as a stockbroker at the Park Avenue office of Merrill Lynch in New York City. Leigh was later employed at Morgan Stanley Dean Witter where he continued to advise equities and stock index oriented customers until 1986, when he joined PaineWebber as the stock index and fixed-income derivatives strategist. He later became senior technical analyst at PaineWebber, taking over from Jack Schwager and was widely followed by the brokers there, especially by those with an active option and index trader clientele. Leigh indicates that "it was my great good fortune to have been privately mentored by a hugely successful professional stock options and index trader, Mark Weinstein. Mark made brilliant use of technical analysis techniques and principles, which he trained me in. I later brought Mark to the attention of Schwager while we worked together at PaineWebber and Jack featured him in his first Market Wizards book, where I am also mentioned." In 1993, Leigh was invited to join Dow Jones Telerate as senior manager for technical analysis and spearheaded the growth in the institutional trading room environment of Dow Jones TradeStation, the premier technical analysis/systems testing and development application. While at Dow Jones, he continued to write and train in the area of the technical analysis, using the Dow Jones Markets magazine and client seminars as his vehicle, as well as by overseeing the technical analysis and product training of 30 Dow Jones TradeStation support personnel. In 1998, Cantor Fitzgerald, the largest third market equities and fixed income broker-dealer in the world, making markets for the major mutual funds, Wall Street firms like Merrill Lynch and Goldman Sachs and online brokers such as Charles Schwab, tapped him to revamp the Cantor Morning News web site, the most highly rated morning market summary going out to the major institutional stock trading community (1999 Reuters survey). While at Cantor, Leigh also wrote the highly popular "Stevens on Technical Analysis" weekly columns for CNBC.com. His ability to make technical analysis understandable and useful to the average trader and investor, lead to his authoring, Essential Technical Analysis, due out in spring 2002 from John Wiley & Sons. While on leave writing this introductory book, Cantor Fitzgerald, which occupied the top floors of #1 World Trade Center, was devastated in the 9/11/01 terrorist attack. While personally saddened by the loss of so many colleagues, Leigh was also then able to become more involved in web-based advisory services, joining OptionInvestor.com as chief market strategist. According to Leigh, "my first love is the market and advising individual traders and investors. My vehicle of choice for doing that is the Internet and OptionInvestor.com offers the premier service in this field." ******************** INDEX TRADER SUMMARY ******************** I Cannot See It We got a little chart-happy in here tonight... hope you can forgive me. It would be easy to fill a section like this with 15 to20 charts each night, but who wants to flip thru all that? So we whittled our visit down to an array of pertinent facts, or at least those that seem pertinent to me! (Daily Chart: CSCO) Divesting from the norm of our sector watch for one snapshot, let’s peruse mighty CSCO for a bit. I know some readers may think of me as just an “index guy” because the human mind like to compartment and pigeon-hole ideas. Would you believe I might know a thing or three about stocks as well? Actually, any technical trader should be able to game whatever symbol is pasted in front of them. Show me the symbol for Garbanzo bean futures (don’t exist) and we’ll trade them just the same! Anyway, CSCO depicts all that’s wrong with tech right now. I personally expected tech to ramp this past week based on daily chart signals poised to turn positive. I also thought it would be the bull’s last great act of defiance and hoped to short new recent highs with both barrels, but that didn’t happen. We noted a half-handful of problems CSCO has right now, and this chart mirrors the Nasdaq as one would expect. Descending channel resistance held. 50 DMA just made a bearish cross below 200 DMA, both are pointing down and both are above price action in resistant fashion. The little bull flag (pink) failed to breakout and close above resistance. Upside-down hammer candle on Friday that closed back inside the bull flag is bearish. Volume peaked on the way down and declined from the very day price action began moving up. Declining volume on rising price action is bearish. Lastly, stochastic values are now in pure-bear decline. SOX calls, anyone? Sell them short for best odds here, as everything I see with no exception in this chart screams for lower prices ahead, probably to black and/or red channel lines of support. (Weekly/Daily Charts: PPH) Those elusive Head & Shoulder patterns. Druggies, er, I mean pharmaceutical players thought they had one ready to bust it loose in bullish fashion right here until BMY needed aspirin. At best is closed for one day above this arbitrary neckline before collapsing in bearish fashion from there. Watch for a sideways coil consolidation here and short that puppy when it break lower again. Stochastic values in bearish fashion at the time would confirm such a pattern should it develop, of course. (Weekly/Daily Charts: XAU) The last time gold made its big move down I was caught not watching and missed seven index points profit. Since then it hit the bottom of a descending channel and screamed back up these past eleven days, culminating with a three-day run. The engulfing candle (or outside day) Wednesday told us prices would go higher, and gold stocks could have made for nice short-term plays. From here I would expect the index to retest recent highs and possibly move beyond there. I actually first drew this channel using two lows and one high point of reference in my laptop when back in NY. The laptop is still there and so is this original channel. Fine lot of good that does me this week! With six personal PCs and all of them sporting Qcharts I’d better become adept at moving saved files around, hadn’t I? This omission cost me some bucks on XAU calls! We’ll get around to an article on drawing channels out in blank space with only three price points to reference soon... if you don’t already know that trick, it’s one not to miss. (Weekly/Daily Charts: SOX) What would the night be like in here without pulling up our SOX? Eric tells us this sector is up 14.4% in Q1 to date and at one point was more like +25% near recent highs. We don’t see a return to those levels right now. Matter of fact, the SOX might be lucky just to maintain those gains to finish out the stretch. You & I both know that a bunch of “traders” out there never even bother looking at charts. They are merely playing end-of-quarter markup hopes and buying every dip to catch the big ramp. Might work, might not. If big funds want to dress windows with investor’s fleece they will have to paint this tape against a bearish triangle and bearish stochastic values. Anything can happen right now and chart signals do turn on a dime, but fading these technicals here on a prayer that markup season will save long entries is not trading. Those who tried that last March got totally creamed in the process, and this one might not turn out much differently. (Daily Charts: VIX and Dow) And for everyone not sick of hearing about the VIX any longer (both of you) we have yet another blurb about it. Can you believe the Dow is -240 index points off recent highs and the VIX actually shed -2 index points during the drop? What does that tell us about irrational dipsters snapping up calls right now? Yes, I’ve heard & read all the theories on why a lower VIX may be benign to the rally this time. “It’s all different this time” go the recent theories more numerous than stories about aliens at Rockwell. Guess what? I’ve heard the same collective mantra each time the VIX hit 20 or below. I’ve also bought puts with two or three month’s time value all the way down each time as well. No need to ask me how that strategy fared before: just compare history on any index chart on what happens when the VIX inevitably cycles back up to high 20s from there. My current DJX May 104 puts entered at 10,600+ are not suffering tonight, nor do I expect them to in the days & weeks ahead! (Weekly/Daily Charts: XNG) Here’s a little sell & hold freebie... natural gas. Long-term charts are looking toppy, right in time for the seasonal weakness of summer. Nat gas two biggest uses are heating and electricity generation but close behind that is agricultural consumption by farmers. What for? To dry all that small grain down to acceptable specs for sale. Ever drive by any grain farms in the country and see steam rising out of cylinder mesh structures on a crispy fall day? That’s the work of natural gas turning water to vapor. Seasonal strength returns in late summer-early fall, so XNG Jul 170 puts @3.50 “ask” right now could easily double (or better) with a possible target to 160 area by mid-summer. One of those low beta, buy & forget type plays using a -50% stop or no stop to risk it all and park in the account for months ahead. Summation My nightly sector scan showed roughly two dozen downside play setups and about 18 of them are listed as shorts to track in Sector Share Gameplan. Doesn’t mean the markets won’t turn tail and head for the moon on Monday, but a preponderance of sectors are looking bearish right now. So we feel the fear of upside short squeeze but trust the charts to keep us on the proper side of high-odds direction. Fundamentals say markets should rally into the month-end ramp and earnings fallacy ahead. Technicals point to further weakness right now. I for one with trust the charts and trade with trepidation as always. Best Trading Wishes, Austin P ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** Editor's Plays ************** Will They or Won't They? (we still don't know!) The HWP/CPQ vote was proclaimed a win by HWP but only by the smallest of margins. We will not know the real outcome for about two weeks. The combination play from last Sunday is still in progress. This is an update. Last week: Update: On the April positions the call has decreased to around a quarter and the put traded as high as $.75 on Friday. Because the decision will not be known for as long as two weeks HWP stock is still undecided. However the memo on slow service sales on Friday could pressure HWP next week and help push the stock down. If the merger announcement is made as well some analysts have said they could see HWP below $15. Last Week: Update: The longer term plays of buying a leap call on the dip and selling a leap put at the same time is looking good. The call decreased to $3.00 on Friday and the put is increasing in price with every dip. The target of $3.50 on the call has already been met but I would wait until the stock finds a bottom before starting the play. If you are bullish on HWP long term I think this will be a winner. I would like to see HWP hit $15 before initiating the play. ******************** PVN Update Providian was upgraded on Friday when CIBC World Markets said "the liquidation risk is gone." They have turned this business around and have become attractive as a take out target. Morgan Stanley said, "it is difficult for us to imagine downside risk below $5." The company also settled some class action lawsuits and defaults from risky borrowers have slowed. I have written about this stock several times since November so you cannot say I did not warn you. ********************** Low Volatility Plays Because the volatility has shrunk so much it makes combination plays much more attractive. Considering the possibility for a major market move in the next several weeks I am going to offer a couple today. QQQ combination The Nasdaq is looking weak and should it break 1825 it could easily see 1700 again. This would knock the QQQ back to the $33.50 range. I would buy the April $37 call and April $36 puts for a net debit of $2.25. If you only want to buy one side I would bet on the put based on the chart. ************************* Semiconductor sector The semiconductor sector is attempting a breakout of resistance from 2001. If the SOX can clear 650 the SMH should break 50. Once a breakout occurs there is a good chance a very strong short covering rally would appear. On the bearish side it is possible there could be some more earnings warnings pointing to another economic dip. That is why a combination play looks so good. A strong move in either direction could be profitable. Once direction is established I would close the losing side since the strike prices are $5 apart. Unlike the QQQ it requires much more movement to recover the losing side. ******************* I strongly recommend buying options that are farther out than April. How much time you buy is up to you but most everyone would expect the move to occur within 60 days. That gets us into the normal April/May sell off periods. ******************* DJX May Puts There is a good chance backed by a strong historical trend that the markets will sell off between April-15th and May-15th. Speculators could stock up on May DJX puts whenever the Dow hits 10600 between now and then. They should cost under $2.00 whenever that happens. This is a gamble so don't buy too many but use them as a hedge against any long plays you might have. *************** As always, do your own research and be comfortable with the downside risk before entering any play. Good Luck Jim **************** MARKET SENTIMENT **************** Tech Correction Ahead? By Eric Utley The Nasdaq-100 Bullish Percent ($BPNDX), in terms of risk, made a big move in last Friday's session. The strength of tech stocks will be put to test in next week's trading. Since February, the $BPNDX had been in Bull Confirmed mode by way of Bullish Percent through last Thursday. That changed last Friday when the indicator reversed into Bull Correction. Like the description below suggests, Bull Correction is a market that is typical of a pullback or correction in stocks. The absolute level, however, is equally as important as the market stance. The $BPNDX reached 70 not too long ago, meaning that 70 of the Nasdaq-100 (NDX.X) were on buy signals. With that kind of deliberate, dare I suggest speculative, buying levels reached, the market grew overbought as we pointed out in previous columns. Now that the $BPNDX has reversed into a corrective market stance, the downside risks increase. What that means for bulls in NDX-type stocks is that risk management becomes all the more critical in the investment process. If you're sitting on big gains in some of the chip equipment stocks such as KLA-Tencor (NASDAQ:KLAC) or Novellus (NASDAQ:NVLS), then some sort of downside protection needs to be implemented. That can be as simple as setting a protective stop-loss to as complex as a natural hedge. Or, you can buy a protective put on an equal ratio basis to your underlying position. With as cheap as implied volatility is selling for, using a put makes sense. The low level of implied volatility is coming from the drop in the CBOE Market Volatility Index (VIX.X). It closed below the 20 level for the second consecutive session in last Friday's trading. What's interesting is that some of our indicators are starting to come together in terms of bearishness. We saw the VIX dip below 20 last Thursday. Bearish. We saw the $BPNDX reverse into Bull Correction Friday. Not bullish. And the S&P Commercials maintained a hefty short position through the most recent reporting period. Bearish. The confluence of these three indicators comes at an interesting time in the business cycle, using the recent macro data as our reference. They certainly make one test his or her bullish convictions. If nothing else, they reinforce the need for proper risk management. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 10428 Moving Averages: (Simple) 10-dma: 10549 50-dma: 10079 200-dma: 9995 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1149 Moving Averages: (Simple) 10-dma: 1160 50-dma: 1128 200-dma: 1144 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1470 Moving Averages: (Simple) 10-dma: 1495 50-dma: 1494 200-dma: 1545 Gold and Silver ($XAU) The XAU capped off a very strong week last Friday be earning the day's best performing sector spot. The XAU finished 3.44 percent higher in Friday's session. The index gained 9.60 percent last week. Sector leaders included Gold Fields (NASDAQ:GOLD), Harmony Gold (NASDAQ:HGMCY), Agnico Eagle Mines (NYSE:AEM), Anglogold (NYSE:AUD), and Meridian Gold (NYSE:MDG). 52-week High: 70 52-week Low : 46 Current : 68 Moving Averages: (Simple) 10-dma: 64 50-dma: 63 200-dma: 57 Oil Service ($OSX) The OSX was the poorest performing sector in last Friday's session with its 4.95 percent drop. A warning from Baker Hughes (NYSE:BHI) combined with a host of bearish analyst sentiment put the sellers in control for the first time in a long time. Leading to the downside included Baker Hughes, BJ Services (NYSE:BJS), Rowan Companies (NYSE:RDC), Tidewater (NYSE:TDW), and Cooper Cameron (NYSE:CAM). 52-week High: 136 52-week Low : 58 Current : 98 Moving Averages: (Simple) 10-dma: 100 50-dma: 88 200-dma: 87 ----------------------------------------------------------------- Market Volatility The VIX closed below the magical 20 level for the second consecutive session in last Friday's session despite the overwhelming weakness in stocks. The VXN traced an inside day, finishing slightly higher on the weakness in the Nasdaq-100 (NDX.X). CBOE Market Volatility Index (VIX) - 19.98 -0.75 Nasdaq-100 Volatility Index (VXN) - 36.98 -1.18 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.66 405,502 268,190 Equity Only 0.61 375,596 230,703 OEX 0.84 5,087 4,272 QQQ 0.44 42,632 18,617 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 64 + 0 Bull Confirmed NASDAQ-100 64 - 1 Bull Correction DOW 77 + 0 Bull Confirmed S&P 500 75 - 1 Bull Confirmed S&P 100 77 - 1 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.04 10-Day Arms Index 1.08 21-Day Arms Index 1.01 55-Day Arms Index 1.22 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1329 1810 NASDAQ 1512 2006 New Highs New Lows NYSE 163 44 NASDAQ 152 24 Volume (in millions) NYSE 1,243 NASDAQ 1,335 ----------------------------------------------------------------- Commitments Of Traders Report: 03/19/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 S&P Commercials maintained their relatively higher net bearish position in the prior week by dropping a significant number of longs and a small number of shorts. The group's % of OI, however, increased by a larger amount. Small traders maintained their yearly high net bullish position. Commercials Long Short Net % Of OI 03/05/02 361,254 445,989 (84,735) (10.5%) 03/12/02 396,050 483,606 (87,556) (9.9%) 03/19/02 322,938 410,494 (87,556) (11.9%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 03/05/02 161,711 60,941 100,770 45.3% 03/12/02 179,825 75,025 104,800 42.6% 03/19/02 145,262 43,066 102,196 54.3% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 104,800 - 3/05/02 NASDAQ-100 NDX commercials dropped a big chunk of their long position, resulting in a drastic climb in the group's net bearish stance. Small traders went the opposite direction by shedding a larger number of short contracts, establishing a firm net bullish position. Commercials Long Short Net % of OI 03/05/02 33,549 35,419 (1,870) (2.7%) 03/12/02 37,415 42,942 (5,527) (6.9%) 03/19/02 24,792 33,699 (8,907) (15.2%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: 7,774 - 12/21/01 Small Traders Long Short Net % of OI 03/05/02 11,961 11,214 747 3.2% 03/12/02 14,571 13,045 1,526 5.5% 03/19/02 11,637 5,527 6,110 35.6% Most bearish reading of the year: (9,877) - 12/21/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Dow commercials shed a significant number of both long and short positions. The result of their actions was a drastic drop in the group's net bullish position. Small traders reduced their total position, too, resulting in a modest drop in the group's net bearish position. Commercials Long Short Net % of OI 03/05/02 37,036 25,554 11,482 18.3% 03/12/02 35,080 23,204 11,876 20.4% 03/19/02 20,858 13,283 7,575 22.2% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 03/05/02 6,589 13,057 (6,468) (32.9%) 03/12/02 6,400 13,070 (6,670) (34.3%) 03/19/02 4,651 10,367 (5,716) (38.1%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck" * IRA Accounts Available * 8 different FREE options pricing, strategy, and charting tools * Real-Time Buying Power, Account Balances or Cancels * EASY screens for spreads, collars, covered calls or butterflies! Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor013 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** *************** ASK THE ANALYST *************** EOQ By Eric Utley The quarter's end brings strange happenings to stock prices. Those stocks that have performed poorly during the last three months are often dumped in favor of those that have performed well. The short-term imbalances in supply and demand can cause irrational price fluctuations that are, in turn, exploitable by traders. It's a game that should be played by only the best of traders because of the internal risk factors involved. Here's a list of likely targets of quarter's end posturing: QTD (%) Gold Fields (NASDAQ:GOLD) 104 Cymer (NASDAQ:CYMI) 84 Expedia (NASDAQ:EXPE) 68 Rent-A-Center (NASDAQ:RCII) 51 P.F. Chang's (NASDAQ:PFCB) 42 ImClone (NASDAQ:IMCL) -44 McData (NASDAQ:MCDT) -52 Genesis Micro (NASDAQ:GNSS) -58 Sprint PCS (NYSE:PCS) -58 Riverstone (NASDAQ:RSTN) -68 The point and figure charts that appear in this column were created using www.StockCharts.com. Please send your questions and suggestions to: Contact Support ---------------------------- Alaska Air Group (NYSE:ALK) ALK just hit a 1 year high, but it's a 3X top. With the economy growing do you think this a safe med-T investment (2 - 3 months)? - Tom Thanks, Tom. If we're going to investigate Alaska Air, then surely we must first examine the broader Airline (XAL.X) industry. After all, Alaska Air is a component of the XAL. So by using the XAL as a gauge for the broader business, we may be able to apply our findings from the sector to the individual stock. Flying High The XAL is better by about 19 percent year-to-date. It's hard to believe, but very true. The sector is one of the best performing so far this year. With the exception of the dramatic losses from operations recently reported, the developments in the group have supported the rally from the September lows. Frontier Airlines (NASDAQ:FRNT) -- a regional player based here in Denver -- continues to add new destinations and increase frequency to existing destinations. Others, such as Southwest (NYSE:LUV), expect to add a significant number of jobs this year as a continuation of their expansion efforts. And just last week, the Seattle-Tacoma Airport reported that traffic had rebounded to near pre-September levels. You'll note, however, that the three aforementioned airlines share a commonality: they're smaller, regional carriers. The majors have traded well, don't get me wrong. But the majors are the ones who've been reporting the historic losses from operations. That is, they continue to lose money at a huge rate. But that hasn't slowed the ascent of the XAL. About two weeks ago, the index trade about two points away from its pre-09/11 levels, which reflected the return of traffic. In the two weeks following the XAL's relative high up around 115, the index pulled back to consolidate its big first-quarter rally. Last Thursday, it rebounded from the psychologically significant century mark. If I were looking for a bullish position in the XAL, I'd actually like to see a little more downside work put in before attempting a trade or investment. In terms of levels, I've been using the same retracement bracket for months now, which is anchored at September 10's close and the low traced later in that same month. The XAL has been tracking the levels fairly close and I think the levels make sense for use in determining downside risk. For example, the 61.8 percent retracement level sits down around the 95 level, which may be a good spot to look for bullish plays. XAL - Retracement and Trend Lines In addition to the retracement bracket, I've used two major trend lines on the above chart. The red line is the long standing bearish resistance line that was broken in early March. That could continue serving as support as it did last Thursday. Should the XAL slide down its previous resistance line, it would be reinforced by the supporting trend line coming off of the November and February lows. When the two points converge could be a nice spot to enter bullish plays with a stop at the 61.8 percent retracement level. Triple-Top Trouble If ALK is going to breakout above the triple-top that Tom alluded to, then it will obviously need the XAL to trade higher. In other words, ALK will need the airline business to improve further in order to support a move above its intermediate-term resistance at $33 to $34. The retracement bracket that I've used on the ALK chart below reinforces why the $33 level has served as such meaningful resistance for more than a year. I like this bracket quite a bit for its tight fit to historic levels, such as the lows in late 1998 and early 2000. And obviously the bumps against resistance at the 38.2 percent level add credence. ALK - Weekly Retracement The question then becomes whether to buy a breakout or wait for a pullback? The answer is a matter of style and risk preference. If you think the airline business is going to dramatically improve over the next two to three months, then using the breakout above $34 as an action point makes sense. If, however, you think that the airline business might gradually improve at a slow rate over the intermediate-term, then it makes more sense to wait for a level in ALK that holds less downside risk. Using a retreat in the XAL to its above mentioned support possibilities would correspond with lower prices in ALK and potentially less risk, thereby positioning ahead of the ultimate breakout above the $34 level all the while with less risk. The point and figure chart reveals the same resistance level that the retracement shows on the weekly chart. There are a couple of observations to take away from the PnF chart. First, the current vertical count for ALK is 42.50. There's plenty of upside potential from current levels using that number, which I think would make a good intermediate- to long-term upside target. Second, the closest support level is down at $28. Third, there's some serious congestion between the $33 and $35 levels, but beyond that resistance zone sits pretty easy prices. ALK - Point and Figure ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* Monday, 03/25/02 Existing Home Sales (DM))Feb Forecast: 5.50M Previous: 6.04M Tuesday, 03/26/02 Durable Orders (BB) Feb Forecast: 1.0% Previous: 2.6% Consumer Confidence (DM) Mar Forecast: 98.0 Previous: 94.1 Wednesday, 03/27/02 New Home Sales (DM) Feb Forecast: 880K Previous: 823K Thursday, 03/28/02 Initial Claims (BB) 03/23 Forecast: 375K Previous: 371K GDP-Final (BB) Q4 Forecast: 1.4% Previous: 1.4% Chain Deflator-Final (BB) Q4 Forecast: -0.2% Previous: -0.2% Mich Sentiment-Rev. (DM) Mar Forecast: 95.0 Previous: 95.0 Chicago PMI (ISM) (DM) Mar Forecast: 54.0 Previous: 53.1 Help Wanted Index (DM) Feb Forecast: N/A Previous: 47 Friday, 03/29/02 Personal Income (BB) Feb Forecast: 0.2% Previous: 0.4% Personal Spending (BB) Feb Forecast: 0.4% Previous: 0.4% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-24-2002 Sunday 2 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** INDEX TRADER GAMEPLANS ********************** Index Trader Swing-Trade Game Plan: Saturday 03/23/2002 Rocky Ride Still Ahead News & Notes: From Thursday’s Summation: “All charts suggest we go lower again tomorrow, but today's bullish close and Friday's pattern of green cannot be ignored. Call players be careful and use these clear measures of resistance / support to stay above. Odds favor puts below resistance if chart signals roll down from overbought zones, which is the way I'd play options on Friday.” Pretty much just what happened, save a counter-trend rally during the lunchtime lull that made put plays a tough proposition. Relatively small range day compared to what we’ve seen, and Monday points to a lower open. Let’s see what may happen from there: Featured Markets: [60/30-Min Chart: OEX] Stochastic values on weekly/daily charts (not shown) are still descending in bearish fashion. We have intraday charts still bearish across the spectrum as well. Price action remains trapped in a descending channel while forming brief consolidations that suggest an upside pop is near. I would not fade the W/D charts and play call options myself, instead preferring to see what happens near lines of resistance for put play potential instead. [60/30-Min Chart: SPX] Likewise SPX, as always. A different view for this 30-min chart gives us one more set of pivot lines to watch as well. I will only play put options on further downside moves and not calls for upside plays due to wide bid/ask spreads when fading the W/D “trend”. [60/30-Min Chart: QQQ] QQQs are the same... poised to try an upside pop but bias remains lower on W/D charts. Call options here make sense with tiny bid/ask spread and only sector charts looking somewhat bullish are tech related. Summation: We could see market action in both directions this week, but what else is new? Above are the clear pivot points to stay long above or short below as personal choice dictates. I’d play any puts or QQQ calls if using options and be prepared for continued intraday volatility ahead. Downside gets the technical nod, upside has fundamental bias so let’s be careful out there! Trade Management: Option traders may choose listed In-The-Money (ITM) or Out-The- Money (OTM) contracts by personal preference. They are selected based on volume, open interest and "Delta" values in that order. Our preference is usually OTM contracts except for the last few days of expiration when ATM or ITM contracts are preferred. Entry triggers are points where plays are tracked when price action breaks above for calls or below for puts. Stops are the exact opposite of that. Sell targets are points to exit based on index levels or %gain on option contract price as noted. *No entry targets listed mean the models are idle at that time. New Play Targets: QQQ DJX Apr Calls: 38 (QQQ-DL) Apr Calls: 106 (DJV-DB) Long: BREAK ABOVE none Long: BREAK ABOVE none Stop: Break Below Stop: Break Below Apr Puts: 37 (QQQ-PK) Apr Puts: 105 (DJV-PA) Long: BREAK BELOW none Long: BREAK BELOW none Stop: Break Above Stop: Break above OEX SPX Apr Calls: 600 (OEY-DT) Apr Calls: 1175 (SPT-DO) Long: BREAK ABOVE none Long: BREAK ABOVE none Stop: Break Below Stop: Break Below Apr Puts: 590 (OEB-PR) Apr Puts: 1150 (SPT-PJ) Long: BREAK BELOW none Long: BREAK BELOW none Stop: Break Above Stop: Break Above Open Plays: None Index Trader Sector-Trade Game Plan: Saturday 03/23/2002 Majority Vote Is Lower News & Notes: Our Weekly/Daily chart scan of all tradable indexes and sectors shows a majority in bearish reversal fashion right now. Charts posted in the weekend Index Wrap summarize what we see. Featured Plays: Index Wrap Summation: A slew of short listings to cross-compare stock holdings in these various sectors. Scares us a little to hear the masses expecting each dip to explode upward into month-end manipulation but technicals say otherwise. We must trust the charts but do so with prudence knowing greater odds DO NOT equate to sure-thing trades now or ever! Trade Management: Entry triggers are points where plays are tracked when price action breaks above for calls or below for puts. Stops are the exact opposite of that. Sell targets are points to exit based on index levels or %gain on share price as noted. No entry targets listed mean the model is idle at that time. Asterisk means stop-loss level changed since prior posting New Play Targets: QQQ ** SMH ** BBH ** Short: 36.60 Short: 46.25 Short: 126.25 Stop: 37.50 Stop: 26.75 Stop: 130.00 OIH ** MKH ** RTH ** Short: 65.50 Short: 58.50 Short: 100.00 Stop: 69.00 Stop: 61.50 Stop: 104.00 TTH ** FFF ** IWD Short: 38.50 Short: 82.25 Short: 57.50 Stop: 41.00 Stop: 86.00 Stop: 60.00 IWM IWS IYC Short: 99.75 Short: 60.40 Short: 57.00 Stop: 104.00 Stop: 63.50 Stop: 59.50 IWW IYY IVE Short: 73.70 Short: 53.00 Short: 55.50 Stop: 77.00 Stop: 56.00 Stop: 58.00 XLE IYM XNG (options only) Short: 28.40 Short: 41.50 Short: 193.25 Stop: 31.00 Stop: 43.50 Stop: 203.00 Open Long Plays: None Open Short Plays: XLB ** XLP ** Short: 23.75 Short: 26.00 Stop: 24.50 Stop: 26.75 XLV ** XLY ** Short: 29.00 Short: 29.90 Stop: 30.25 Stop: 31.00 IYD IYK Short: 45.25 Short: 45.90 Stop: 47.00 Stop: 47.00 IYR IYE Short: 84.75 Short: 49.70 Stop: 86.00 Stop: 52.00 RTH ** IJJ Short: 98.00 Short: 97.00 Stop: 102.00 Stop: 99.00 DIA **[DJX] IYM Short: 105.90 Short: 42.00 Stop: 105.90 Stop: 43.00 *********************************************************** DAILY RESULTS *********************************************************** CALLS Mon Tue Wed Thu Week ACS 54.83 3.71 -0.75 0.35 -0.79 1.79 Dropped, stop BAC 68.65 -0.37 0.05 -1.02 0.16 -0.53 Strong bank IDPH 69.20 1.03 -0.62 -2.72 2.54 -0.73 BTK pulled back CEPH 68.00 0.83 -0.36 -1.70 1.55 0.63 Best bio stock GENZ 51.80 0.91 -0.38 -1.03 1.32 1.79 200-dma test COF 63.37 0.43 1.33 -1.66 0.12 1.32 Gained strength EOG 40.16 0.53 0.89 -0.33 0.72 0.91 10-dma support EXPE 68.37 2.55 0.43 1.59 1.01 3.44 Ticking higher TXN 33.16 -0.09 0.57 -1.07 0.66 -0.93 Waits on SOX.X KLAC 65.25 0.37 0.91 -1.82 1.05 -0.24 Chip leader CAH 70.05 0.84 -0.35 -0.55 0.85 0.99 New, running ROOM 69.00 3.63 1.00 0.01 -0.27 4.73 New, performer PUTS RYL 89.32 -1.63 1.35 -3.81 0.48 0.62 Dropped, relief ISSX 25.89 0.34 -0.55 -2.13 1.46 -2.31 Ready to break MIL 44.86 -0.41 -1.24 0.10 0.08 -1.61 Breaking down GDW 62.47 -0.70 -1.38 -1.54 -0.17 -3.33 Losing ground TMPW 32.99 1.11 0.62 -2.69 0.29 -2.14 New, sell FLIR 44.69 1.85 1.63 -4.95 2.15 -1.28 New, broken EMLX 31.55 -1.34 1.92 0.28 2.20 2.67 New, shorts ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* CAH - Cardinal Health $70.05 (+0.99 last week) See details in play list Put Play of the Day: ******************** TMPW - TMP Worldwide $33.03 (-2.10 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ ACS $54.83 (+1.79) It looks like the party is over for traders of ACS. The stock has given us a nice little ride up the charts over the past couple weeks, but the latest round of consolidation appears to be taking too much wind out of the buyers' sails. Even though the stock closed above our $54.50 stop on Friday, the intraday dip below that level shows that the stock's strength is waning. Like we mentioned on Thursday, a drop into that gap we were rewarded with on Monday will likely mean the gap is going to be filled. We don't want to wait for that to happen while our gains dwindle, so we're locking them in now. Use any strength on Monday to exit at a better price. PUTS ^^^^ RYL $89.32 (+0.62) There's no denying the weakness we've seen in housing stocks over the past couple weeks, and RYL has been leading the way down, at least until Friday's session that is. Thursday's doji reflected the indecision in the stock and on Friday buyers (or shorts covering) went on a tear, allowing the stock to rise nearly 5% on heavy volume. Our stop is still intact at $89.50 and there is a fair amount of resistance near $90, but we'll err on the side of caution and harvest our gains here. If the housing stocks continue to look weak down the road, it's a safe bet that we'll be seeing RYL in the put list again. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-24-2002 Sunday 3 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** NEW CALL PLAYS ************** CAH - Cardinal Health $70.05 (+0.99 last week) Cardinal Health, Inc. is a provider of products and services to healthcare providers and manufacturers, helping them improve the efficiency and quality of their healthcare services and products. Cardinal Health has four reporting segments: Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and Services, Pharmaceutical Technologies and Services, and Automation and Information Services. Despite the recent problems among the major drug makers, shares of diversified health care firms have been acting healthy. The momentum appears to be building within the group. Prudential Securities brought the group into focus recently with its initiating of coverage on several companies within the group with an investment rating of buy. Prudential's note focused on D&K Healthcare Resources (NASDAQ:DKWD), McKesson (NYSE:MCK), AmerisourceBergen (NYSE:ABC), and Cardinal Health (NYSE:CAH). The premise of the buy rating on these stocks was solid profitability, improving industry fundamentals, consistent annual earnings growth, and relative safety. One of the leaders in the group, CAH, Prudential set a price target of $83 for the stock based on the company's strong growth prospects. The market seemed to agree with the analysts' prognosis as CAH recently broke out above a critical resistance level. Last week saw the stock continue higher following its breakout, but most of the stock's move came in the early part of last week's trading. As the week wore on, CAH spent most of its time trading sideways, ending the week with a modest $1 gain, but that gain did manage to best the performance of the broader stock measures. The relative reliability and stability of CAH's earnings is beginning to attract investors who should continue carrying the stock higher into next week's trading. Traders looking for a breakout entry can use an advance past the $71 level as such. Those who'd rather wait for a pullback can do so near the 200-dma at the $69.12 level. Our stop is initially in place at $68. BUY CALL APR-65 CAH-DM OI= 301 at $5.80 SL=3.50 BUY CALL APR-70*CAH-DN OI=1478 at $2.10 SL=1.00 BUY CALL MAY-70 CAH-EN OI= 63 at $3.10 SL=1.75 BUY CALL MAY-75 CAH-EO OI= 370 at $1.10 SL=0.75 Average Daily Volume = 3.03 mln ROOM - Hotel Reservations Network $69.00 (+3.73 last week) Hotel Reservations Network, Inc. is a consolidator of hotel and other lodging accommodations. The Company contracts with lodging properties in advance for volume purchases and guaranteed availability of rooms at wholesale prices, and sells these rooms to consumers often at significant discounts to published rates. The Company's supply relationships also often allow it to offer customers accommodation alternatives for otherwise unavailable dates. The online travel business is booming. Just take a look at shares of some of the leading players in the business. Option Investor recently added Expedia (NASDAQ:EXPE) to the call play list as the stock continues to trace new all-time highs. Hotel Reservations Ntwk is another stock in the group that continues to trade with incredible strength and consistency. the company operates a network of hotel and general lodging properties, putting it in the middle of the travel rebound. The company has taken strides to align itself with others in the business, such as airlines, in an attempt to further boost sales and profits. The analyst community is jumping on the momentum. Just last Friday, Pacific Crest securities raised its price target on ROOM to $96. Pacific Crest also opined that ROOM as in the early stages of a two year cycle that will drive the company's sales growth profit potential. The prospects for a rebounding economy will only add to the upside potential for this company and its stock price. Aggressive traders can look to begin entering new call plays early next week on an advance past the $70 level. Confirmation would be provided on a rally above the $71 level going into next week's trading. Because of the stock's stellar performance and lofty price, it could be a target for end of the quarter window dressing through next week, which would add to the upside potential in short term plays. Those looking for intraday pullbacks can start to focus on the $66 to $67 levels for rebound points. Our stop is initially in place at the $65 level. BUY CALL APR-65 URD-DM OI=238 at $6.70 SL=4.50 BUY CALL APR-70*URD-DN OI=294 at $4.00 SL=2.00 BUY CALL MAY-65 URD-EM OI= 0 at $8.60 SL=6.00 BUY CALL MAY-70 URD-EN OI= 0 at $6.10 SL=4.75 Average Daily Volume = 1.80 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** IDPH - IDEC Pharmaceuticals $69.20 (-0.73 last week) IDEC Pharmaceuticals Corporation is a biopharmaceutical company engaged primarily in the research, development and commercialization of targeted therapies for the treatment of cancer and autoimmune and inflammatory diseases. The company's first commercial product, Rituxan, and its most advanced product candidate, ZEVALIN (ibritumomab tiuxetan), are for use or intended for use in the treatment of certain B-cell non-Hodgkin's lymphomas (B-cell NHLs). IDPH traced a slightly higher high in last Friday's session from its rebound in last Thursday's trading. The stock continued higher along with the broader market and the AMEX Biotechnology Sector Index (BTK.X), but was unable to continue along its rebound path because of the weakness in the broader market. The consolidation that we've been anticipating the biotech sector may actually come into play during next week's trading, taking our cue from the failure of the sector to move higher in last Friday's session. The rebound from Thursday had the potential to push IDPH above its short term resistance levels, but because it failed in Friday's session, we may need more time to digest the recent rally before the breakout is realized. But some consolidation over the next few sessions wouldn't necessarily be a bad thing as long as IDPH holds its pattern or relatively higher lows. That means on any pullback next week, IDPH needs to hold above the $66.75 level. We'd also like to see volume pullback in conjunction with weakness in price. Such a development would be indicative of profit taking and normal consolidation and could eventually lead to the breakout that we've been looking for. Pullbacks next week between the $67 and $68 levels can be used to gain entry points into new positions. Remember that if the stock closes below the $67 level, which is the current site of our protective stop, then we'll drop coverage. Continue to monitor the BTK.X for help when trading IDPH. BUY CALL APR-60 IHD-DL OI=1479 at $10.70 SL=9.00 BUY CALL APR-65*IHD-DM OI=3461 at $ 6.60 SL=5.00 BUY CALL APR-70 IHD-DN OI=6513 at $ 3.40 SL=2.00 BUY CALL JUL-65 IHD-GM OI=2606 at $10.90 SL=9.25 BUY CALL JUL-70 IHD-GN OI=2390 at $ 7.60 SL=6.00 Average Daily Volume = 3.65 mln CEPH - Cephalon $68.00 (+0.63 last week) Cephalon, Inc. is an international biopharmaceutical company focused on the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In the United States, the Company markets three products, Provigil (modafinil) Tablets [C-IV] for treating excessive daytime sleepiness associated with narcolepsy, Actiq (oral transmucosal fentanyl citrate) [C-II] for the management of cancer pain in opioid tolerant patients, and Gabitril (tiagabine hydrochloride) for the treatment of partial seizures associated with epilepsy. CEPH gained a good amount of relative strength in last Friday's session when the stock finished fractionally higher. By comparison, its sector, the Biotechnology Sector Index ($BTK), finished more than 1% lower. While CEPH's 0.45% gain may not have seemed like a lot last Friday, it was actually a very good day for the stock in relation to its sector performance. It's good to know that we're in one of the strongest stocks in the broader biotech sector, but that alone may not be enough to make this play successful. What we really need is for the BTK to continue along its path of higher highs, which would allow CEPH to breakout above its short term resistance, which appears to have formed at the $69 level. We saw again in last Friday's session that CEPH rolled over right below the $69 level. It's hard to determine whether or not that shorts are leaning on CEPH just below the $69 level or whether the bulls are taking profits at the $69 level. Either way, if we see the breakout above the $69 level in an advancing market and sector, then we should witness CEPH continue into the $70 range that we've been targeting all along. However, further weakness in the BTK should prevent CEPH from breaking out. Therefore, the key in this play is closely monitoring the price action in the BTK and taking your cues in CEPH from the sector price action. If the BTK does trade lower in next week's trading, then look for a pullback down into the short term support area at the $66 level. BUY CALL APR-65 CQE-DM OI=2793 at $5.60 SL=4.25 BUY CALL APR-70*CQE-DN OI=3903 at $2.65 SL=1.25 BUY CALL MAY-65 CQE-EM OI= 705 at $7.30 SL=5.50 BUY CALL MAY-70 CQE-EN OI=2258 at $4.40 SL=3.00 Average Daily Volume = 2.43 mln COF - Capital One Financial $63.37 (+1.32 this week) Capital One Financial Corporation is a holding company whose subsidiaries provide a variety of products and services to consumers using its proprietary information-based strategy. The Company's principal subsidiary, Capital One Bank, a limited purpose credit card bank, offers credit card products. Capital One, F.S.B., a federally chartered savings bank, offers consumer lending and deposit products. The relative strength that we saw COF display in last Thursday's session, albeit small relative strength, followed through in a very big way into last Friday's session. The stock out paced the major financial sector indexes, including the KBW Bank Sector Index (BKX.X) and the AMEX Securities Broker/Dealer Index (XBD.X). As we've written before, COF is not a component of either index, but the stock does tend to track the broader financial measures for obvious reasons. The out performance was most positive to witness again in last Friday's session, which saw COF continue after its rebound above the 10-dma in last Thursday's session. The next major resistance level in the way of COF's ascent is at the $65 level. In a favorable market with the financial measures participating, COF should be able to breakout above that resistance level and continue higher over the short term. Traders can choose to use a breakout above the $65 level as an entry point with the understanding that such a move may carry more risk and less upside than an entry pursued during intraday weakness or near support. If COF does breakout above the $65 level, then we'll use the $67 level, which is only two points away from the short term resistance, as the potential upside target. That's why we prefer entering on weakness ahead of a potential breakout, which would reduce risk and increase the potential upside. The key for entering on weakness if finding a good support level where the stock is likely to rebound from. The 10-dma, now just below the $62 level, could be used as such an entry point during intraday weakness. BUY CALL APR-60*COF-DL OI=4210 at $4.90 SL=2.50 BUY CALL APR-65 COF-DN OI=3467 at $1.95 SL=1.00 BUY CALL JUN-65 COF-FM OI=1379 at $4.60 SL=2.00 BUY CALL JUN-70 COF-FN OI=1332 at $2.70 SL=1.75 Average Daily Volume = 3.03 mln EXPE - Expedia $68.37 (+3.44 last week) Expedia, Inc. is a provider of branded online travel services for leisure and small business travelers. The Company operates full service travel agency Websites targeted at customers in a number of geographies. The Company operates Expedia.com in the United States; Expedia.co.uk in the United Kingdom; Expedia.de in Germany; and Expedia.ca in Canada. The increasingly complex demands from travelers coupled with a move by the major carriers to severe ties with travel agents have put the online travel agencies in the sweet spot of a rebounding industry. The travel industry was obviously adversely impacted by the events of September 11, but was one of the first businesses to rebound, and rebound big! Expedia epitomizes the sweet spot that has become the online travel business as the company continues to expand, take market share, and strike major deals with airlines. While a pricey stock, Expedia's growth prospects have attracted the aggressive buyers, who continue to push shares higher. In the very short-term, it's that recent performance that we're concerned with. The stock is one of the better high-profile performers among Nasdaq listed stocks, making it a prime target for end of the quarter window dressing -- the practice by money managers to boost the price of core holdings in an attempt to increase performance. We saw some of that buying in last Friday's session earlier in the day, when the market was trading higher. That could be the biggest variable in this play: the market. What we saw last Friday could continue playing out into next week's trading. In a favorable bullish market, EXPE will most likely continue higher into next week. But weakness could stall the stock as the end-of-month buyers may not have enough power to overcome weakness in the broader market. That being the case, traders are still better off looking to intraday weakness at short term support levels for entry points. The $67 area supported the stock last Friday, which may continue to do so into next week's trading. If the stock falls under heavier selling pressure, a rebound from the $66 mark could produce a good entry point. To the upside, $70 could serve as resistance in the short term, where a breakout above could lead to a move higher by two or three points. BUY CALL APR-65 UED-DM OI= 143 at $6.10 SL=4.75 BUY CALL APR-70*UED-DN OI=1778 at $3.10 SL=1.50 BUY CALL APR-75 UED-DO OI= 139 at $1.45 SL=0.50 Aggressive!! BUY CALL MAY-70 UED-EN OI= 21 at $4.70 SL=2.50 Average Daily Volume = 715 K BAC - Bank of America Corp. $68.65 (-0.53 last week) Providing a diversified range of banking and certain non-banking financial products and services, BAC's operations consist of Consumer Banking, Commercial Banking, Global Corporate and Investment Banking, and Principal Investing and Asset Management. Consumer Banking targets individuals and small businesses, while Commercial Banking targets businesses with annual revenues up to $500 million. Global Corporate and Investment Banking provides investment banking, trade finance, treasury management, leasing and financial advisory services. Principal Investing includes direct equity investments in businesses and general partnership funds, while the Asset Management businesses are split into three branches; Private Bank, Banc of America Capital Management and Banc of America Investment Services. Despite a volatile week in the broad markets, the Banking sector (BIX.X) has been holding up well, managing a decent rebound off the lows on Thursday to close out the week just above the $900 level. Bullish traders are looking for the BIX and the broader Financial sector to continue higher as proof that this mini-bull market actually has legs. Shares of BAC had a rather quiet week, remaining trapped between the $67.50 level on the downside and $69.50 on the upper end. This range is likely to break in the week ahead, and when it does, we'll get the answer as to the strength of both the banking group and the broader market. Our action plan remains essentially unchanged for the play, as we want to take advantage to dips and bounces in the vicinity of $67.50 support to initiate new positions. Trading the breakout over the $69.50 level may work as well, but it is harder to manage risk when trading breakouts in a stock that appears to be losing momentum. Buy the dips for the best entry points and only trade the breakout if it comes on strong volume. Keep stops at $66.75. BUY CALL APR-65 BAC-DM OI=10636 at $4.50 SL=2.75 BUY CALL APR-70*BAC-DN OI=14277 at $1.15 SL=0.50 BUY CALL MAY-70 BAC-EN OI=27601 at $2.05 SL=1.00 BUY CALL MAY-75 BAC-EO OI=11771 at $0.50 SL=0.25 Average Daily Volume = 5.75 mln EOG - EOG Resources, Inc. $40.16 (+0.91 last week) EOG Resources explores for, develops, produces and markets natural gas and crude oil primarily in producing basins in the United States, as well as in Canada and Trinidad. EOG's operations are all natural gas and crude oil exploration and production related. The company's North American operations are divided into eight autonomous divisions, organized by geographical region; Midland, Texas; Denver Colorado; Tyler Texas; Corpus Christi, Texas; Mid-Continent; Pittsburgh, Pennsylvania; Calgary Canada and the Houston, Texas/Offshore Division. After staging a solid breakout over the $192 level earlier in the week and then clearing the 200-dma, the Natural Gas index (XNG.X) suffered a bout of profit taking on Friday, opening at the high and closing at the low. Coming to rest just above the converged 10-dma ($192.78) and 200-dma ($192.94), the XNG will need to see some bullish conviction to defend the $192 level as new-found support. One factor that likely contributed to the profit taking on Friday was the weakness in the price of the June Natural Gas contract (NG02M), but this just looks like normal profit taking, since both the XNG index and NG02M are holding above their respective 200-dmas. The reason we focus so much on the sector and commodity for this play is that EOG is a pure-play in the Oil and Gas sector. As goes the sector, so goes the stock. Sure enough, after the breakout over the $40 level earlier in the week, EOG is consolidating above the $40 level, testing it as support each of the past 3 days. We're looking at these dips at support as attractive entry points, but wouldn't rule out a brief dip near the $39.50 level before the bulls are convinced to start buying again. Confirm strength in both the XNG and the futures contract before playing. Keep stops set at $39. BUY CALL APR-40*EOG-DH OI=1411 at $1.65 SL=0.75 BUY CALL APR-45 EOG-DI OI= 292 at $0.25 SL=0.00 BUY CALL MAY-40 EOG-EH OI= 95 at $2.40 SL=1.25 BUY CALL MAY-45 EOG-EI OI= 104 at $0.65 SL=0.25 BUY CALL JUL-45 EOG-GI OI= 816 at $1.40 SL=0.75 Average Daily Volume = 1.05 mln GENZ - Genzyme General $51.80 (+1.79 last week) Genzyme General, a division of Genzyme Corporation, is focused on developing innovative products and services to solve major unmet medical needs. GENZ has nearly 600 products and services on the market and a strong pipeline of therapeutic products for the treatment of rare genetic diseases. The Diagnostics business unit develops, markets and distributes in vitro diagnostic products and genetic testing services. With a solid, profitable revenue base, this research is intended to maintain the company’s high rate of earnings growth. Even though there was a bit of weakness seen in the Biotechnology sector (BTK.X) on Friday, it is hard to argue with the strength this group has been showing since confirming its lows near the $455 level n early March. Resistance is being found at the 50% retracement of the December-January decline ($537), with additional resistance being created by the 200-dma at $536. But once clear of that obstacle, the BTK should work up to the next level of resistance near $558, the site of the 62% retracement. Despite the weakness seen in the broader sector, shares of GENZ are looking particularly healthy and managed to post yet another gain on Friday. Just kissing the 200-dma ($52.17) on Friday, the stock still managed to post its highest close since the middle of January and has just pushed through the bearish resistance line with the strength over the past week. The PnF chart is forecasting a price rise to the $71 level, so you can see that we are in the early stages of the move. And with the profit taking early in the week, the overbought condition has been relieved enough to give the bulls a shot at breaking through the 200-dma and challenging the next level of resistance near $54-55. Thursday's dip near the $49 level provided a great entry, and we want to continue to use intraday dips to establish new positions. Look for a retracement near the $50 level to provide entry, or else wait to enter on a breakout over the $52.25 level. We're moving our stop up to $49 this weekend. BUY CALL APR-50*GZQ-DJ OI=3254 at $3.70 SL=2.25 BUY CALL APR-55 GZQ-DK OI=2569 at $1.15 SL=0.50 BUY CALL MAY-50 GZQ-EJ OI= 45 at $4.80 SL=3.00 BUY CALL MAY-55 GZQ-EK OI= 201 at $2.10 SL=1.00 Average Daily Volume = 4.60 mln KLAC - KLA-Tencor Corporation $65.26 (-0.23 last week) KLA-Tencor is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's comprehensive portfolio of products, software, analysis, services and expertise id designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to KLAC for in-line wafer defect monitorin, reticle and photomask defect inspection, CD SEM metrology, wafer overlay, film and surface measurement and overall yield and fab-wide data analysis. Despite the positive news out of Chip companies on Thursday night, the Semiconductor index (SOX.X) couldn't seem to make any positive headway on Friday amid the broad market weakness. The SOX finished just over 1% lower for the day, and that weakness is setting the stage for us to gain an attractive entry into our KLAC play. If the rebound in the Semiconductor industry is truly upon us, it should be led by the companies at the lower end of the food chain, namely the chip equipment names like KLAC and AMAT. Despite its rather volatile path, KLAC is up more than 30% year-to-date, and that should make it attractive to fund managers that are attempting to improve the appearance of their funds ahead of the end of the quarter. KLAC has been riding a solid bullish trend higher since the middle of January, and the trendline connecting the higher lows since then is currently resting at $63, coincidentally the level where the stock found support just over a week ago. We continue to believe that if you want to play the bullish trend in volatile stocks like KLAC, the best entry points will be achieved by target shooting the intraday dips to support. Consider new entries near the $64.50 level (also the site of the 20-dma), or else look for another rebound off the $63 level. We have our stop set at $62.75. BUY CALL APR-65*CKV-DM OI=5436 at $3.80 SL=2.25 BUY CALL APR-70 CKV-DN OI=6982 at $1.50 SL=0.75 BUY CALL MAY-65 CKV-EM OI= 60 at $5.80 SL=3.75 BUY CALL MAY-70 CKV-EN OI= 180 at $3.30 SL=1.75 BUY CALL MAY-75 CKV-EO OI= 149 at $1.80 SL=1.00 Average Daily Volume = 9.55 mln TXN - Texas Instruments $33.16 (-0.93 last week) How about Semiconductors R Us? TXN has broad-based exposure to the semiconductor market, especially in digital signal processors and analog integrated circuits. TXN's products are used in a diverse range of electronic systems, including digital cell phones, computers, printers, hard disk drives, networking equipment, and digital cameras. TXN also supplies electronic controls equipment, sensors, radio-frequency identification systems, and sophisticated graphing calculators. While there was a fair amount of positive news in the Semiconductor arena Thursday night in the form of MU's earnings and a stock split announcement from AMAT, it wasn't enough to keep the bulls interested on Friday in the midst of an uncertain broader market. The SOX finished in the red, but the damage wasn't too bad at only a bit more than 1%. The big question is whether chip bulls will come back with a fresh appetite as we head into the final week of the quarter. There will likely be some window-dressing shenanigans as usual, and we're going to be looking for that to give us a solid entry in our TXN play. Friday's session left the stock resting right on its 20-dma ($33.07) and this is interesting because of the stock's recent behavior. Over the past month, TXN has violated the 20-dma several times, but each time it has found support and bounced strongly from the ascending trendline that currently rests near the $32 level. So look for the stock to either bounce from the 20-dma (possible support) or else the $32 level to provide entries into the play. If the trendline fails to provide support, then we'll know we had it wrong, hence we have a tight stop in place at $31.75. BUY CALL APR-32*TXN-DZ OI=13378 at $2.25 SL=1.00 BUY CALL APR-35 TXN-DG OI=32729 at $1.10 SL=0.50 BUY CALL APR-37 TXN-DU OI=10036 at $0.40 SL=0.00 BUY CALL MAY-35 TXN-EG OI= 773 at $1.75 SL=1.00 BUY CALL MAY-37 TXN-EU OI= 480 at $0.95 SL=0.50 Average Daily Volume = 10.5 mln ************* NEW PUT PLAYS ************* EMLX - Emulex Corporation $31.55 (+3.67 last week) A leading networking company, EMLX designs, builds and distributes three types of connectivity products: network access servers, printer servers, and high-speed fibre channel products. It's fibre channel products, which are based on internally developed ASIC technology, are deployable across a variety of network configurations and operating systems to support increasing volumes of stored data. EMLX sells its products directly throughout the world to OEMs and end users, as well as through system integrators and industrial distributors. Sometimes a play treats you so well the first time around, that you decide it warrants another helping. With the recent weakness in the Storage-related stocks, that area of the market continues to look like a pleasant playground for the bears. Shares of EMLX have been trapped in a descending trend since early February, and the trendline connecting those lower highs was almost reached on Friday before the selling party started again. The trendline is currently sitting at $33.50, but buyers ran out of steam when EMLX briefly crested the $33 level. The sharp pullback from the 38% retracement (of the fall rally), which sits at $32.50, indicates that this will be a tough level of resistance going forward. The short covering bounce over the past few days has lifted the daily Stochastics well out of oversold territory, and if Friday's afternoon weakness persists into next week, then we should soon see the stock testing the 50% retracement level near $28. While another failed rally just below the trendline would make for the best entry, we have to remain flexible in case the stock just rolls over from here. On continued weakness, look to enter new positions on a volume-backed drop below the $30.75 intraday resistance level. Areas of recent support that could potentially spark a bounce are $29, $28 and $26.50. We are initiating coverage of EMLX with our stop set at $34. BUY PUT APR-32 UMQ-PZ OI=2976 at $3.20 SL=1.50 BUY PUT APR-30*UMQ-PF OI=3509 at $2.00 SL=1.00 BUY PUT APR-27 UMQ-PY OI=1021 at $1.10 SL=0.50 Average Daily Volume = 9.66 mln FLIR - FLIR Systems $44.69 (-1.28 last week) FLIR is engaged in the design, manufacture and marketing of thermal imaging and stabilized camera systems for a wide variety of commercial, industrial and government applications. The company's products are divided into two categories, which include the thermography products and imaging products. In the Thermography division, FLIR manufactures products that are sold to commercial, industrial, research and machine vision customers. For industrial customers, FLIR has developed thermography systems that feature accurate temperature measurement, storage and analysis. The Imaging division caters to military, law enforcement, surveillance and security customers. Being the hot stock of last year (or even last month) carries little cache in the current market, especially with end-of-quarter window dressing looming next week. Defense stocks were the place to be until just recently, but judging by the weakening in the Defense index (DFI.X), that relative strength may be waning. After riding up the rally in the DFI index, shares of FLIR seemed to stall and run out of steam near the $60 level, and the fall from grace over the past 2 weeks has not been pleasant for the bulls. Specifically, FLIR has lost nearly $12 in that time and judging by the recent action, the decline isn't over yet. After the big gap down on March 15th, prompted by news that the SEC will bring a civil injunctive case against the firm for events that occurred in 1998 and 1999. The stock bounced somewhat off the lows due to analyst pronouncements that the sharp decline was an over-reaction to news that does not materially affect the company presently. But despite FLIR reaffirmation of earnings estimates, the relief bounce ended quickly and the stock is now back below firm resistance at $47.50. It appears destined to test the $40 level next, and quite possibly the $35-37 area, where, the 200-dma is waiting to offer somewhat stronger support. Use another failed rally near the $47-48 area to initiate new positions, or else wait for a drop below the $44 level on strong volume. Note that FLIR bounced from the $42 level back on March 15th, so that is a possibility when that level is reached again. We're initiating the play with our stop set at $48.50. BUY PUT APR-45*FFQ-PI OI=242 at $3.70 SL=2.00 BUY PUT APR-40 FFQ-PH OI=333 at $1.60 SL=0.75 Average Daily Volume = 562 K TMPW - TMP Worldwide $33.03 (-2.10 last week) TMP Worldwide is a recruitment advertising agency and executive search and selection firm. The company has built Monster.com into one of the Internet's leading career destination portals. In addition to offering these career solutions, TMPW is a yellow page advertising agency. The company has more than 60,000 clients, including over 90 of the Fortune 100 and over 480 of the Fortune 500. When you find a persistent trend that continues to work, smart traders would do well to stick with it. Despite the fact that job losses have slowed in recent weeks and the employment statistics are starting to improve marginally, there isn't much talk of large companies doing much in the way of fresh hiring. This lack of growth can be clearly seen in the daily chart of TMPW, which has been in a persistent trend of lower highs since March of 2000. In fact the descending trendline, connecting all the highs since August of 2000, still rests up at $42.50, just above the 200-dma ($42.20). Note that TMPW hasn't been able to seriously test this trendline since early January and brief forays above the 200-dma continue to be met with fierce selling. That appears to be the case again right now, after TMPW rolled over near the $39 level earlier this month. Friday's price action was particularly damaging, with the stock falling below the 20-dma ($33.80) and posting a fresh sell signal on the PnF chart. This double-bottom breakdown gives us a bearish target of $26, which corresponds to the intraday lows from late February. Look for entries to materialize on a failed rally at the $34 resistance level, or possibly as high as $36. Alternatively, use a breakdown under the $31.50 level to initiate fresh momentum-based positions. Place stops at $37. BUY PUT APR-35*BSQ-PG OI=1806 at $3.80 SL=2.25 BUY PUT APR-30 BSQ-PF OI= 373 at $1.40 SL=0.75 Average Daily Volume = 2.93 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-24-2002 Sunday 4 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** CURRENT PUT PLAYS ***************** MIL - Milipore $44.86 (-1.61 last week) Millipore Corporation and its subsidiaries are engaged primarily in the development, manufacture and sale of products that are based on separations technology and are used for the analysis, identification and purification of liquids and gases. Millipore also generates revenues from the manufacture and sale of products based on electromechanical and pressure differential technologies to monitor and control critical aspects of the manufacturing process for integrated circuits. Following the breakdown early last week, MIL spent the latter half of the week trading sideways. It remains to be seen if the last three sessions has been merely a short term consolidation ahead of the next leg lower, or if it's been the beginning of a short term bottom in the stock. The pattern of gradual selling remains intact, which keeps our bearish ideas alive this weekend. We're lowering our stop to the most recent relative high just below the $47 level. If we see that level broken above in next week's trading, then MIL will most likely have formed a short term bottom, having removed the downside risk in this play. However, the stock just as easily breakdown in next week's trading below its recently established lows. If the breakdown does come next week, then we'll see MIL definitively decline below the $44 level. That should open the way for additional long liquidation and potential bring in a large number of shorts who should pressure the stock lower into the short term. The stock seems to continue to trade along with the broader market, so naturally we'd like to see the market give up some ground in next week's trading and add additional supply to MIL. In terms of action points, intraday rallies up to the 10-dma in the high $45s to as high as $46.50 could be used to enter bearish plays. Just make sure to watch for a rollover and internal weakness in the stock before trying to pick a relative top. Lower volume on any intraday strength could be indicative of a weak rally and a following rollover. Those who favor the momentum type of entry points can use a decline below the $44 level to enter new put positions. BUY PUT APR-50 MIL-PJ OI= 0 at $5.60 SL=4.00 BUY PUT APR-45 MIL-PI OI=10 at $2.10 SL=1.00 Average Daily Volume = 325 K GDW - Golden West Financial $62.47 (-3.33 this week) Golden West Financial Corporation is a savings and loan holding company, the principal business of which is the operation of a savings bank business through its wholly owned savings bank subsidiary, World Savings Bank, FSB. The Company operates 120 savings branch offices in California, 37 in Florida, 36 in Colorado, 22 in Texas, 15 in Arizona, 11 in New Jersey, eight in Kansas, and four in Illinois. The potential for higher short-term rates is pressuring select segments of the financial sector. Specifically, the savings and loans have seen heavy selling in recent sessions. The Fed's move to a neutral bias signaled an end to the historic reduction in short-term lending rates that we witnessed in the past year. Indeed, long-term rates have been rising as signaled by the recent rally in the benchmark 10-year Yield (TNX.X). The rise in long-term rates seems to suggest that short-term rates will follow. J.P. Morgan raised those concerns last week when the brokerage firm reduced its investment rating on shares of Golden West. Analysts at J.P. Morgan cut their rating to a long-term buy from a buy rating. The basis for the downgrade was an expectation for a drop in earnings due to a lower spread in rates. J.P. Morgan went on to suggest that earnings would drop off after the first quarter due to a slow down in loan originations because of higher long term rates. Although it's still very early for the potential of a hawkish monetary policy and the higher short term rates that accompany such a monetary stance, the bears are now waiting to pounce on stocks such as GDW that are closely tied to the ebbs and flows of short term rates. The stock broke down last week, issuing its first sell signal since last October. The stock stopped at the $61 support level, which may continue to provide help going into next week's trading, depending on what the broader market does. Traders who like playing breakdowns can use a decline below the $60 level as an entry point with a downside target at the $55 level. If the market does rally and carry GDW higher next week, then target intraday rollovers between the $63 and $65 potential resistance zone. Also, keep an eye on bond yields as a rising TNX.X could help to pressure GDW lower. BUY PUT APR-65 GDW-PM OI=360 at $3.50 SL=2.00 BUY PUT APR-60*GDW-PL OI=155 at $1.20 SL=0.75 Average Daily Volume = 780 K ISSX - Internet Security Systems $25.89 (-2.31 last week) Internet Security Systems is a global provider of security management solutions for protecting e-business. The company's Adaptive Security Management approach to information security protects distributed computing environments from attacks, misuse and security policy violations, while ensuring the confidentiality, privacy, integrity and availability of proprietary information. ISSX delivers an end-to-end security management solution through its SAFEsuite security management platform coupled with around-the-clock remote security monitoring through the company's managed security services offerings. Did you catch a piece of that entry point? The short covering on Thursday lifted shares of ISSX off the $25.50 level, but the bears were back in charge on Friday, hitting the stock for more than a 5% loss. We've been focusing on ISSX due to the relatively poor performance of the Internet Security stocks in recent weeks and that doesn't look like it is likely to change anytime soon. VRSN cast a pall over the group on Wednesday, revealing in its 10K that a portion of its sales were actually barter deals with other firms like IBM. Whether that issue exists at other firms like ISSX, it is clear from the recent price action in the stock that all is not well. After falling to support and getting a bit of a bounce on Thursday, ISSX moved up to the 20-dma ($27.57), where the bears were lying in wait, pushing it right back down to support. Any intraday bounce that fails to penetrate the $28 resistance level looks like an attractive entry on the subsequent rollover. Alternatively, wait for support at $25, (the site of the 50% retracement of the fall rally) to give way, preferably on heavy volume, before opening new positions. Lower stops to $28.50. BUY PUT APR-30 ISU-PF OI=716 at $5.50 SL=3.50 BUY PUT APR-25*ISU-PE OI=468 at $2.35 SL=1.25 BUY PUT APR-22 ISU-PX OI=388 at $1.35 SL=0.75 Average Daily Volume = 2.71 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** Inchworm, Inchworm By Mark Phillips Contact Support Jeff Bailey frequently uses the snake or inchworm analogy to describe sectors of the market or even the whole enchilada. The basic concept is that first the head of the snake or inchworm will move forward, then the tail and body catch up, allowing the head to once again move forward. Here's the problem with our markets-- the belly of the inchworm is glued to the ground. Can you imagine the lunacy of an inchworm trying to move forward without the ability to raise that belly off the ground? The front and back of the inchworm would gyrate wildly in an attempt to create forward progress, but the only net result is that the inchworm would get tired. Doesn't that seem awfully similar to the current state of the markets? We test (and sometimes break resistance) as the stronger sectors forge ahead (head of the inchworm). But then we test and sometimes break support as the weaker sectors fall back (can you say Telecom?). And then there is the bulk of the market that is pretty much stuck in the middle. Here are a couple of perfect examples of that lack of progress that the belly of the inchworm is experiencing. Except for a couple of brief, panic-induced selloffs, shares of chip giant INTC have been stuck between $25-35 for over a year and right now sit in the middle of that range at $30.59. And what about industrial conglomerate GE? It looks to me like this stock has moved into a new, lower trading range in the $35-42 area until things improve. And if conditions worsen, then I wouldn't be surprised to see an even lower trading range develop. Why the dramatic about face on GE? Well, I was starting to cool my heels on the stock after yet another rejection at the $42 resistance level, but the thing that pushed me off the fence here was the comments from PIMCO's Bill Gross last week. Stating that his funds would carry no commercial GE paper for the foreseeable future may seem like no big deal to stock traders, but believe me, it is potentially huge. The reasoning behind his action is that GE has commercial paper outstanding which totals three times the size of their bank lines which back them up. Excuse me?? Is that like borrowing against your house to the tune of 300% of its fair-market value? Exactly! No wonder PIMCO is getting out while the getting is still fairly good. Don't get me wrong, GE is still a great company and the only remaining component of the original Dow 30. But there is an excessive debt load and now questions are starting to be raised about the way the company has created its growth over the past decade -- namely through acquisitions. GE has acquired more than 100 companies in each of the past 5 years using the company's high P/E stock or commercial paper through GE Capital. Needless to say, I no longer want to keep GE in the Watch List. The stock may go up or it may go down, but the risks of holding it over the long term just increased significantly in my opinion. Our play on the Biotech sector through the BBH HOLDR is performing well. Although it is moving in a 2 steps forward, 1 step back fashion, it continues to move steadily up the chart. Last week's move through the long-term descending trendline near $125 was an important milestone on the road to recovery, giving me the confidence to raise our stop to the $120 level. My hat's off to our very own Eric Utley, who called a bottom in this sector back in early February. The next hurdle for the bulls to overcome will be the $130 area followed by $135, the site of the shorter-term (10-month) descending trendline. With the weekly Stochastics still rising solidly towards overbought, dips into the $122-123 area still look buyable for new positions. Our long-term forecast is for the BBH to top the $140 level as the PnF chart is telling us that the bullish price target is a lofty $144. But coming back to the inchworm analogy of the markets, here's another stock that has caught my attention lately -- not for a trade, but for an indication of the kind of rangebound action we are seeing in so many areas of the market. AMGN is the big daddy of the Biotechs, but can't seem to get moving, with a nearly 2-year series of lower highs under its belt and numerous bounces from the $53 support area as the stock builds a huge descending wedge. I don't have an opinion on this stock right here, but it certainly seems to be the proverbial belly of the inchworm, glued firmly to the ground. IBM continues to consolidate above support and below resistance, keeping us in a wait and see position. The stock looks like it could charge back towards the $115 level, but first will need to clear the formidable resistance resting near $109, which happens to be just above the 200-dma. Support has been building above the $103 level, and it appears unlikely that we'll see the $100 level tested again without a significant negative event. So I'm raising the stop this weekend to $100. Continuing to show good relative strength, shares of JNJ are holding up well, and I would expect the stock to shoot to new highs once the daily oscillators bottom in oversold and turn up again. For those still looking to enter this trade, I would look at a dip and bounce in the $62.50-63.00 area to be a gift of an entry point. Another glance at the PnF chart, shows the vertical count off the current column of X's to be projecting an eventual price target of $86. Whether it moves that high remains to be seen, but it appears there is plenty of upside potential available. And what about the Watch List? Although sorely tempted on a couple of occasions, I refrained from taking any positions this week. The ones that had my attention were the LUV play and BRCM. I was really thinking about ignoring all my technical analysis on LUV and taking the entry as the stock rebounded from just above its 200-dma last week on the theory that the Transports (and the Airlines too) were set to head north again. But with the weekly Stochastics for both LUV and the XAL index in bearish mode, I decided to sit this one out and wait for a better entry. I think we'll get another chance to enter this play in the $18 area and possibly a bit lower, now that the momentum in the sector has slowed somewhat. Note the lowered entry target this weekend. BRCM was giving me all the signs for a solid entry on Friday morning with those daily Stochastics trying to peek up out of oversold territory. But the closing price action was quite disconcerting. I want to see healthier price action off the $36 level before taking a position. Let's see what happens next week as portfolio managers engage in their end-of-quarter window dressing. Target lowered here as well. I just knew that move up on the daily Stochastics on MDT wasn't to be trusted. See how it rose from oversold to overbought with very little upward price action? Now that the downward cycle has begun, look for an entry to materialize near our target in the relatively near term. If you aren't using the Market Monitor during the day (or at the end of the day for those of you that have day jobs), you're missing out on a tremendous information source. Eric and Jeff do a top-notch job of highlighting all the little stock and sector developments as they occur, and penned some insightful commentary on the solid move in the Utility sector this week. It looks like I'm not going to be so fortunate as to grab an entry on the DYN play down at the $27 target, with the UTY sector breaking out. While I'm leaving that target in place, just in case, I'm adding a slightly higher one at $29 this week. The daily Stochastics are just starting to roll over and we'll just have to see where price bottoms out on this oscillator cycle. I'm hoping for $27, but expecting something closer to $29. I hesitate to even say anything about the VIX this week. It continues to work lower and is now under 20, for the first time since early September of 2000. I think we can all remember what happened shortly thereafter, as the market dove and the VIX soared. Many have offered the opinion that this time it will be different, that a rising market will accompany the next substantial increase in the VIX. Could it happen? Sure, and pigs might fly. Hey, it could happen. But there is zero historical evidence to point to either of these events coming to pass. So until confronted with hard evidence, I will continue to use the low readings of the VIX to be very careful about playing the long side. By the way, Eric has been doing a great series on the VIX in his Market Sentiment column. If you'd like to know more about the VIX and have missed his musings, I highly recommend taking a few minutes to check it out. For those of you that are disappointed with the lack of new plays this week, you'll get what you wish soon. Next weekend, I'm heading out of town early for some much-needed R&R, so the LEAPS column will look a bit different. I'm going to focus early in the week on new plays for the Watch List and expect to have them written by mid-week. But I'm going to keep the introductory commentary rather light, so that I can get an early start on the weekend. So look for several new plays next week to whet your appetite! Have a great week! Mark Phillips mphillips@OptionInvestor.com LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: BBH 03/03/02 '03 $120 OEE-AD $16.60 $20.00 +20.48% $120 '04 $120 KBB-AD $26.20 $29.90 +14.12% $120 IBM 03/03/02 '03 $110 VIB-AB $ 9.80 $10.00 + 2.04% $100 '04 $110 LIB-AB $17.00 $17.80 + 4.71% $100 JNJ 03/05/02 '03 $ 60 VJN-AL $ 5.90 $ 8.30 +40.68% $61 '04 $ 60 LJN-AL $ 9.20 $12.30 +33.70% $61 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BRCM 10/28/01 $35-36 JAN-2003 $ 40 OGJ-AH CC JAN-2003 $ 35 OGJ-AG JAN-2004 $ 40 LGJ-AH CC JAN-2004 $ 35 LGJ-AG LUV 12/09/01 $18-19 JAN-2003 $ 20 VUV-AD CC JAN-2003 $ 15 VUV-AC JAN-2004 $ 20 LOV-AD CC JAN-2004 $ 15 LOV-AC MDT 03/10/02 $40-42 JAN-2003 $ 45 VKD-AI CC JAN-2003 $ 40 VKD-AH JAN-2004 $ 45 LKD-AI CC JAN-2004 $ 40 LKD-AH DYN 03/17/02 $27, $29 JAN-2003 $ 30 ONO-AF CC JAN-2003 $ 25 ONO-AE JAN-2004 $ 30 KYK-AF CC JAN-2004 $ 25 KYK-AE PUTS: EK 01/27/02 $34-35, $32 JAN-2003 $ 30 VEK-MF JAN-2004 $ 30 LEK-MF New Portfolio Plays None New Watchlist Plays None Drops GE $37.87 Most of the reasons for dropping GE were detailed in the commentary above. But even without the disturbing revelations about the companies debt and profit structure, I would still be considering a drop of the stock. While it hasn't had a major selloff lately, neither has it had a significant move to the upside either. And the long-term picture on the PnF chart is looking poor too, with a current price target well below $30. A dip into the $20s might make for an attractive entry point on the stock, but with the other issues clouding the fundamental picture, I believe the best choice is to avoid the stock altogether for now. ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-24-2002 Sunday 5 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Trading Basics: E-mails, E-mails, Everywhere...Q&A Continued! By Mark Wnetrzak This week's questions concern timing the entry with covered-call positions and evaluating the potential for early assignment. Hello Mark, I read your section each week and the picks you make are almost always viable candidates for covered-calls. Since I am in favor of a "technicals-based" approach to position selection, I wonder if the plays might be improved with a more precise method of timing the stock purchase. I personally try to initiate the "buy-in" when the stock begins to break above a long-term base or when it dips to the bottom of an established trading range. Then I wait for upward movement to sell the call, usually when the stock nears a resistance level or overbought area. What do you thing of using this tactic with the covered-call strategy? LP Regarding Position Entry Techniques: The method you described can be very successful when correctly applied but it is not appropriate for every investor or trading strategy. A "single entity" approach to writing covered-calls, where an investor is not interested so much in stock ownership or bullish movement but in obtaining a consistent (monthly) return on investment, is not dependent on timing the bottom of a dip or the break-out to a new upward trend. The primary goal of most investors is to find plays that earn acceptable returns while receiving an above-average amount of downside protection. Using this strategy, a covered-call writer is more interested in the overall technical outlook of the underlying issue throughout the duration of the option series chosen. The questions a trader asks in this case are: Is there a high probability the stock will remain above the cost basis (break-even point) until expiration and does it meet the risk-reward tolerance of my portfolio? The answers must be affirmative or the position should be avoided. Generally, whether the (ITM) covered-write strategy is applied short-term or even longer term, it requires a neutral to bullish outlook on the underlying equity and the overall industry/market. If one believes the underlying stock will decline below the cost basis or the overall market is due for a correction, searching for a different candidate or waiting for a more optimum time to enter the position is prudent. However, if you desire stock ownership or are writing calls on stocks in your long-term portfolio that you don't want to sell, short-term timing becomes much more important. Essentially, an investor of this type would be writing (covered) calls against his permanent stock positions and the use of more precise trend indicators can certainly increase the probability of success with this technique. Regardless of the approach you favor, it should be carefully adapted to match your portfolio outlook and personal trading style. Lawrence McMillan adeptly outlines the covered-write strategies in his book "Options: As a Strategic Investment" and "Trading for a Living," by Dr. Alexander Elder, may also provide some insight on market psychology and short-term trading techniques. Regards, Mark W. OIN Hello OIN, I have been reading the CD (renewal package) about covered calls, and I am wondering how I can evaluate the risk/luck of being called away. If I write an option, will I be called away only the day of expiration, or even earlier? And will I be called away anyway if the call has still an intrinsic value at date of expiration? Thanks to respond my questions EVI Regarding early assignment and probability of profit Generally, as long as there is time premium left in the call, there is little risk of early assignment (and you are earning time premium by staying with the original position). Once an option trades at parity or a discount (or nears expiration), there is a significant probability of exercise by arbitrageurs (floor traders who don't pay commissions). An option writer has several choices at this point: do nothing, get called out and accept the original profit established; or, if appropriate, close the position early (evaluate extra commissions versus an increased annualized return); or roll the call up/down and/or forward to a different strike. Remember, "intrinsic value" is the value of an option if it were to expire immediately with the underlying stock at its current price and at expiration, you should expect that any option with intrinsic value will be assigned. "Options: A Strategic Investment," by Larry McMillan is an excellent resource for option traders, and reading the chapter on covered-calls is highly recommended. Regarding probability analysis, I mentioned two weeks ago that a Monte Carlo style calculator forms a model and runs repeated randomly generated instances of the situation to get a prediction as to how the process might behave. This style of simulation can give you the probabilities of a stock ever reaching the target at any time during the life of a position. Technical analysis is also used by many professionals to identify areas of support or resistance, which can assist in evaluating the probability of a favorable outcome as well as help identify proper exit points. The book, "Secrets for Profiting in Bull and Bear Markets," by Stan Weinstein, is an excellent reference and should help provide a basic understanding of evaluating stocks and their potential movement. Regards, Mark W. OIN Editors note: The current standards for auto exercise of equity options range between $0.25 to $0.75, depending on whether the option is being assigned by the broker or the exchange. SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield PRCS 5.43 5.52 APR 5.00 0.85 *$ 0.42 8.0% MANU 19.42 18.55 APR 17.50 3.40 *$ 1.48 6.7% NXTP 6.05 6.66 APR 5.00 1.50 *$ 0.45 6.1% SIPX 11.15 11.00 APR 10.00 1.90 *$ 0.75 5.9% RSTO 12.69 11.00 APR 10.00 3.30 *$ 0.61 5.6% REV 5.70 5.89 APR 5.00 1.00 *$ 0.30 5.5% PVN 5.71 7.12 APR 5.00 1.05 *$ 0.34 5.3% SYXI 11.26 11.85 APR 10.00 1.85 *$ 0.59 4.5% GSPN 14.09 15.34 APR 12.50 2.20 *$ 0.61 4.5% ENDO 18.40 18.36 APR 17.50 1.75 *$ 0.85 4.4% AEIS 32.59 34.52 APR 30.00 4.00 *$ 1.41 4.3% ZOMX 7.93 7.28 APR 7.50 0.85 $ 0.20 2.5% ATVI 32.30 28.06 APR 30.00 4.00 $ -0.24 0.0% ICST 23.78 20.36 APR 22.50 3.00 $ -0.42 0.0% GMST 22.59 15.70 APR 20.00 4.10 $ -2.79 0.0% *$ = Stock price is above the sold striking price. Comments: Is it just me or is it getting a bit "toppy" out there? With so many traders expecting an "end of quarter" ramp up - will there actually be one? Revlon (NYSE:REV) and Providian (NYSE:PVN) are beginning to cause some "call-sellers" remorse - time will tell. Of the four stocks on last week's watch list, Gemstar-TV Guide (NASDAQ:GMST) was hammered after releasing news of a substantial fourth-quarter net loss and of delays in their patent infringement case. We will show the position closed but longer-term investors (who don't mind tying-up the capital) may decide to adjust the position by rolling down and forward to a NOV-$15 or $17.50 call. Activision (NASDAQ:ATVI) and Integrated Circuit System (NASDAQ: ICST) are at a key moment and with the current market malaise, an early exit may be prudent. We still have a bit of downside room with Manugistics (NASDAQ:MANU) and the stock did manage to stay above its 30-dma, so we'll monitor it closely for the next few days. Two stocks suffered this week after releasing disturbing news: Zomax (NASDAQ:ZOMX) terminated its purchase of iLogistix and Restoration Hardware (NASDAQ:RSTO) offered a multi-quarter earnings restatement with its 4th-quarter earnings. Time to take a "break-even" exit and move onto greener pastures? NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CANI 8.61 APR 7.50 CDU DU 1.45 204 7.16 28 5.2% CTLM 12.96 APR 12.50 UUM DV 1.20 169 11.76 28 6.8% EMKR 9.15 APR 7.50 EUH DU 2.00 3 7.15 28 5.3% ENTG 15.01 APR 15.00 UFN DC 0.70 43 14.31 28 5.2% HOFF 11.38 APR 10.00 UHH DB 1.75 69 9.63 28 4.2% JDEC 18.21 APR 17.50 QJD DW 1.60 638 16.61 28 5.8% SCIO 31.36 APR 30.00 UIO DF 2.80 313 28.56 28 5.5% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CTLM 12.96 APR 12.50 UUM DV 1.20 169 11.76 28 6.8% JDEC 18.21 APR 17.50 QJD DW 1.60 638 16.61 28 5.8% SCIO 31.36 APR 30.00 UIO DF 2.80 313 28.56 28 5.5% EMKR 9.15 APR 7.50 EUH DU 2.00 3 7.15 28 5.3% CANI 8.61 APR 7.50 CDU DU 1.45 204 7.16 28 5.2% ENTG 15.01 APR 15.00 UFN DC 0.70 43 14.31 28 5.2% HOFF 11.38 APR 10.00 UHH DB 1.75 69 9.63 28 4.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** CANI - Carreker $8.61 *** Cautiously Optimistic! *** Carreker (NASDAQ:CANI) is a provider of integrated consulting and software solutions that enable banks to identify and implement e-finance solutions, increase their revenues, reduce their costs and enhance their delivery of customer services. The company's offerings fall into four groups: Revenue Enhancement, which enable banks to improve workflows, internal operational processes and customer pricing structures; PaymentSolutions, which address the needs of a critical function of banks, the processing of payments made by one party to another; Enterprise Solutions, which provides conversion, consolidation and integration consulting services and products on a bank-wide basis; and CashSolutions, which optimizes the inventory management of a bank's cash on hand. CANI rallied sharply in February after the company raised its 4th-quarter earnings guidance, citing revenues carried over from the previous quarter. Carreker surged in March after the company reported earnings that were in fact, well-above consensus analyst expect- ations. As the company said in February, the revenue in their Technology business continued to exceed expectations. The stock has broken above resistance near $6.50 and again near $7.50. This position offers a reasonable entry point for investors who retain a bullish outlook on the company. APR 7.50 CDU DU LB=1.45 OI=204 CB=7.16 DE=28 TY=5.2% ***** CTLM - Centillium Communications $12.96 *** Rally Mode! *** Centillium Communications (NASDAQ:CTLM) designs and markets communications chipset solutions for central office equipment, digital loop carrier line cards, and customer premise equipment for DSL, Voice over Packet (VoP) and Premise Networking markets. The company provides broadband equipment vendors with system-level products for the DSL market, and is leveraging its core technology and expertise to develop products for complementary markets that share common technologies and customers. In January, Centillium said revenues for the 4th-quarter ended December 31, 2001 were $34.5 million and pro forma net income was $200k, or $0.01 per share. In February, Frost Securities raised their rating on the company from "Buy" to "Strong Buy." The stock continues to rally off the September low and is now trying to move above the August high. We simply favor the recent move above the 150-dma (which now provides support) on increasing volume. APR 12.50 UUM DV LB=1.20 OI=169 CB=11.76 DE=28 TY=6.8% ***** EMKR - EMCORE $9.15 *** Bottom Fishing *** EMCORE (NASDAQ:EMKR) develops and manufactures compound semi- conductor products to advance global communications and solid state lighting applications. The company offers a diverse portfolio of compound semiconductor products, including: optical interconnects and devices for data and telecommunications applic- ations; electronic materials for wireless and data and tele- communications; solar cells for satellite communications; and metal organic chemical vapor deposition (MOCVD) tools for the growth of optoelectronic materials. Not much news other than the appointment of a new COO (Larry Kapitan). The stock has forged a 7-month base with support near $8 and some positive long-term technical divergences suggest an upside resolution. APR 7.50 EUH DU LB=2.00 OI=3 CB=7.15 DE=28 TY=5.3% ***** ENTG - Entegris $15.01 *** Revenue Beats Expectations! *** Entegris (NASDAQ:ENTG) is a provider of materials management solutions that protect and transport the critical materials used in the semiconductor and other high technology industries, in particular, the semiconductor manufacturing and disk manu- facturing markets. The company's materials management solutions assure the integrity of materials as they are handled, stored, processed and transported throughout the manufacturing process, from raw silicon wafer manufacturing to packaging of completed integrated circuits. On March 15, Entegris said the loss for its fiscal 2nd-quarter will be less than previously forecast on higher-than-expected revenues. The company said it now expects to report revenues of $50 million and a net loss of 2 cents per share when it reports earnings Monday, March 25. The stock is rallying strongly and appears ready to take out the June high of $15.20. This position offers a reasonable entry point for investors looking for an addition to a long-term portfolio as near-term support is around $13. APR 15.00 UFN DC LB=0.70 OI=43 CB=14.31 DE=28 TY=5.2% ***** HOFF - Horizon Offshore $11.38 *** Oil/Gas Services *** Horizon Offshore (NASDAQ:HOFF) provides marine construction services to the offshore oil and gas industry. The company operates primarily in the U.S. Gulf of Mexico, with additional operations extended into Mexico, and Central and South America. The primary services provided by Horizon include installing pipelines in the Gulf of Mexico and selected international markets; providing pipe-bury, hook-up and commissioning services; and installing production platforms and other structures, and then disassembling and salvaging them at the end of their life cycles. On March 15, Horizon reported net income for the fiscal year ending December 31, 2001, of $10.7 million (before a one time charge), or $0.46 per share diluted. This compares with a net income of $6.4 million, or $0.33 per share diluted in 2000. The stock rallied strongly after earnings though it may now be due for some consolidation. We simply favor the "break-out" of a six-month base and the technical support near our cost-basis. APR 10.00 UHH DB LB=1.75 OI=69 CB=9.63 DE=28 TY=4.2% ***** JDEC - J.D. Edwards $18.21 *** Next Leg Up! *** J.D. Edwards (NASDAQ:JDEC) delivers integrated, collaborative software for supply chain management (planning and execution) procurement and customer relationship management, in addition to workforce management and other functional support. Its enterprise software is designed to help organizations manage and execute internal business functions, such as manufacturing, finance, distribution/logistics and other core operational processes. Customers can choose to operate its software on a variety of computing environments, and J.D. Edwards supports several different databases. The company distributes, imple- ments and supports its software worldwide through 55 offices and more than 350 third-party business partners. In February, J.D. Edwards posted fiscal 1st-quarter earnings that beat lowered estimates, despite a drop in revenue, and said it would meet estimates in the current quarter, citing more efficient operations. We simply favor the bullish technicals as J.D. Edwards broke above resistance at $17 and this position offers a method to participate in the future movement of the issue with relatively low risk. APR 17.50 QJD DW LB=1.60 OI=638 CB=16.61 DE=28 TY=5.8% ***** SCIO - Scios $31.36 *** New Drug Candidate *** Scios (NASDAQ:SCIO) is a biopharmaceutical company developing novel Sciostreatments for cardiovascular and inflammatory diseases. The company is distinguished by its disease-based technology platform, which integrates expertise in protein biology with computational and medicinal chemistry to identify novel targets and protein-based small molecule compounds for large markets with insufficient treatments. Its lead product candidates include Natrecor (nesiritide) and its p38 kinase inhibitor, SCIO-469. On March 11, Scios announced that it has added a new drug candidate to its pipeline that could become the first oral inhibitor of transforming growth factor (TGF- beta). TGF-beta is a multifunctional cytokine, a signaling protein that is produced in a broad range of diseases charac- terized by unregulated scarring and eventual organ failure. The stock has rallied strongly after announcing the new drug candidate moving above resistance at $29 and posting a new all-time high. The upgrade on Friday by Adams Harkness to a "Strong Buy" should help the stock gain altitude as it moves into "Blue Sky Territory." APR 30.00 UIO DF LB=2.80 OI=313 CB=28.56 DE=28 TY=5.5% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield AZPN 22.72 APR 22.50 ZQP DX 1.65 135 21.07 28 7.4% DCTM 25.50 APR 25.00 QDC DE 1.95 375 23.55 28 6.7% GSPN 15.34 APR 15.00 GLQ DC 1.10 2830 14.24 28 5.8% ENDO 18.36 APR 17.50 PFU DW 1.65 222 16.71 28 5.1% NMTC 14.18 APR 12.50 QEK DV 2.20 51 11.98 28 4.7% VRTY 17.14 APR 15.00 YQV DC 2.70 2661 14.44 28 4.2% VRST 19.85 APR 17.50 UVQ DW 3.00 25 16.85 28 4.2% ***************** NAKED PUT SECTION ***************** Success Basics: Option Trading Strategies By Ray Cummins One of our new readers asked about the best way for a beginning trader to approach the options market. Dear OIN, I am new subscriber (through your Premier Investor Newsletter) and am interested in your thoughts about the most successful trading strategies available in this unique form of investing. Since I will be starting from scratch, I would appreciate any ideas you can give me on what books to read and where to go for more information about the basics of options. Thank You, TN Regarding Option Trading Strategies: The wonderful thing about option trading is its diversity. There are an incredible number of strategies available, one for every type of market trend, character and outlook. Positions involving combinations of calls and puts, with different strike prices and expiration months, along with index and futures options, offer the astute trader a variety of ways to participate in the market. This assortment provides even the most conservative investor the ability to construct positions with an acceptable level of risk and reward in almost any situation. The primary requirement for profitable trading is the ability to achieve reasonable returns and control risk effectively. For this reason, a trader without specific goals and a loss-limiting system is certain to fail in the long-run. A very careful and deliberate approach to strategy selection is the first step in the process. After the principal techniques have been identified, it is crucial to execute them with discipline and consistency. Discipline in option trading is the ability to maintain one's self-control and implement the pre-determined plan. The most difficult skill that traders must learn is the ability to overcome human (emotional) impulses. When real money is at stake, the influences of greed and fear (of loss) will attempt to sway your judgment, hindering a rational thought process. If you can not overcome these effects, the chances of success are slim. In fact, that is the primary reason it is so important to utilize strategies that promote a mechanical approach to trading. Techniques that offer little opportunity for indecision generally provide more consistent returns and they are exposed to far less risk than those with a high level of maintenance. Indeed, the secret to success in any form of trading is to have a systematic strategy: a plan of attack. The options market is unique because it offers a variety of different ways to profit however, the risk can often be significant. The easiest way to limit or control the potential for loss is to devise and follow a specific process or set of rules. The structure of this system will require a variety of profitable strategies along with the knowledge to implement and manage them correctly and consistently. Profitable trading strategies have a number of common traits; well defined principles, ease of execution and flexibility. However, the most important characteristic for the majority of investors is asset preservation. In the options market, the successful systems are generally those which employ sound defensive measures. The ability to protect and conserve portfolio capital, while achieving consistent returns is a fundamental requirement of any profitable technique. Fortunately, numerous option-trading strategies satisfy this criteria and our goal at the OIN is to help novice investors learn how to utilize the wide variety of trading techniques and provide them with the tools necessary to profit on a regular basis. For basic option trading information, visit the CBOE's educational website: http://www.cboe.com/LearnCenter/ Some of the most popular books among option traders are: McMillan on Options, by Lawrence McMillan; The Option Advantage, and New Option Secret by David Caplan; Option Volatility and Pricing Strategies, by Sheldon Natenberg; and The Complete Option Player, by Ken Trester. All of these books are available in the OIN's online bookstore. Good Luck! Attn: Naked Puts Editor My broker allows my to trade naked puts. I can see selling two or three naked puts on a stock since I have enough funds in my account to purchase the stock if I am "Put" the stock should it drop below my strike price. I would like to sell 5 to 10 of your conservative naked put recommendations, but I see from my margin account that if I sold this many "naked" puts I would not have enough funds to cover the purchase of the stock if I am put the multiple shares. How does it work if I am put the stock and I don't have enough funds to cover the cost of purchasing the stock? Do you have a day or two to sell the stock before you are committed purchasing the stock? Thanks for your help RK RK, Your question is a common one among readers. Unfortunately, the answer is often very different among brokers. The first thing to understand is that only in rare cases are you put the stock prior to expiration. In fact, other than an occasional random assignment, the underlying issue for any sold (short) put would have to be "deep in the money" before you had a real possibility of early exercise and by that time, good position management techniques would have forced you to close the play to avoid significant capital losses. Of course, there is always the occasional gapping issue that can't be avoided, and that is why you are required to have a specific amount of money in your account; for the apparent (potential) requirement of buying the stock. In reality, you often use the funds to simply close the play under adverse circumstances. You probably know there are other ways of offsetting a short stock position (if you are assigned): you might simply buy some lower strike puts and exercise them -- still a loss, but far generally cheaper than actually buying/selling the stock on paper. That's just one example of the many ways a (personal) broker might help you resolve a condition that requires additional funds to exit a particular "play gone bad" but you have to ask them (your specific brokerage) to explain the manner in which they handle a particular situation or circumstance. Hope That Helps, Ray *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield GMST 20.69 15.70 APR 15.00 0.60 *$ 0.60 11.0% MSO 19.97 18.94 APR 17.50 0.60 *$ 0.60 8.5% NOVN 22.39 22.05 APR 20.00 0.70 *$ 0.70 8.4% DCN 19.10 19.38 APR 15.00 0.55 *$ 0.55 7.8% ACN 29.89 27.63 APR 25.00 0.85 *$ 0.85 7.8% SYXI 12.05 11.85 APR 10.00 0.25 *$ 0.25 7.2% PLMD 22.83 25.40 APR 17.50 0.50 *$ 0.50 7.1% TER 39.20 37.98 APR 32.50 0.95 *$ 0.95 6.9% MU 38.16 33.90 APR 30.00 0.75 *$ 0.75 6.5% MLNM 25.12 24.22 APR 20.00 0.40 *$ 0.40 6.4% TXN 34.09 33.16 APR 30.00 0.75 *$ 0.75 6.3% IDTI 35.99 32.29 APR 27.50 0.65 *$ 0.65 6.0% LRCX 28.88 28.49 APR 25.00 0.65 *$ 0.65 5.7% MLNM 23.66 24.22 APR 17.50 0.40 *$ 0.40 5.6% MRVL 41.38 40.93 APR 30.00 0.70 *$ 0.70 5.6% PLMD 25.95 25.40 APR 20.00 0.35 *$ 0.35 5.5% MRVL 38.60 40.93 APR 27.50 0.50 *$ 0.50 5.3% VARI 35.40 35.85 APR 30.00 0.55 *$ 0.55 5.1% *$ = Stock price is above the sold striking price. Comments: The speculative "bottom-fishing" play in Gemstar (NASDAQ:GMST) provided all the excitement last week as shares of the popular TV programming guide provider dropped to historic lows on news of a substantial fourth-quarter net loss and delays in their patent infringement case. Our position is still positive but traders who no longer want to own the issue should consider closing the play to preserve capital. The midweek rally in technology shares helped a number of our portfolio positions recover but a few issues remain under scrutiny due to the mediocre outlook for the NASDAQ. The only position we are monitoring specifically for early exit (or adjustment) is: Micron Technology (NYSE:MU). NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ALXN 25.80 APR 22.50 XQN PX 0.35 195 22.15 28 5.2% AZPN 22.72 APR 20.00 ZQP PD 0.35 30 19.65 28 5.7% CBST 20.63 APR 17.50 UTU PW 0.55 91 16.95 28 10.5% DCTM 25.50 APR 22.50 QDC PX 0.60 4 21.90 28 8.4% FMKT 27.66 APR 22.50 FAQ PX 0.30 191 22.20 28 5.3% GNTA 18.05 APR 15.00 GJU PC 0.40 1211 14.60 28 9.5% SKX 19.20 APR 17.50 SKX PW 0.30 57 17.20 28 5.2% SNDK 21.10 APR 17.50 SWQ PW 0.25 360 17.25 28 5.3% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CBST 20.63 APR 17.50 UTU PW 0.55 91 16.95 28 10.5% GNTA 18.05 APR 15.00 GJU PC 0.40 1211 14.60 28 9.5% DCTM 25.50 APR 22.50 QDC PX 0.60 4 21.90 28 8.4% AZPN 22.72 APR 20.00 ZQP PD 0.35 30 19.65 28 5.7% FMKT 27.66 APR 22.50 FAQ PX 0.30 191 22.20 28 5.3% SNDK 21.10 APR 17.50 SWQ PW 0.25 360 17.25 28 5.3% ALXN 25.80 APR 22.50 XQN PX 0.35 195 22.15 28 5.2% SKX 19.20 APR 17.50 SKX PW 0.30 57 17.20 28 5.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ALXN - Alexion Pharmaceuticals $25.80 *** New Patent! *** Alexion Pharmaceuticals (NASDAQ:ALXN) develops pharmaceutical products for the treatment of heart disease, inflammation, diseases of the immune system and cancer in humans. Their two lead product candidates are genetically altered antibodies that target specific diseases that arise when the human immune system induces undesired 1inflammation in the human body. Antibodies are proteins that bind to specific targets and are used by the immune system to protect the body. The company's two lead product candidates are designed to block components of the human immune system that cause undesired inflammation while allowing beneficial components of the immune system to remain functional. The product candidates are "humanized" antibodies, designed to block the inflammatory effects of the components of the immune system known as "complement." A humanized antibody is an antibody genetically altered to minimize or avoid an immune response in humans. Alexion and CuraGen Corporation (Nasdaq:CRGN) recently announced they have entered into a drug target discovery and validation agreement initially focused in oncology that may be expanded to include other disease areas. In addition, Alexion has been issued a key patent regarding a complement inhibitor for inflammatory diseases and based on the bullish technical indications, investors believe this issue has future upside potential. APR 22.50 XQN PX LB=0.35 OI=195 CB=22.15 DE=28 TY=5.2% ***** AZPN - Aspen Technology $22.72 *** On The Move! *** Aspen Technology (NASDAQ:AZPN) is a supplier of integrated software and services to the process industries. The Aspen ProfitAdvantage solution consists of a comprehensive set of software and consulting services that supports the company's customers' collaborative engineering, manufacturing, supply chain and e-business strategies, and enables its customers to identify and take advantage of profit opportunities. Their solutions improve a variety of business activities, including streamlining raw material procurement, optimizing production, reducing the cost of delivering finished products to customers and increasing returns from plant assets. These solutions enable customers to improve their competitiveness and overall profitability by increasing revenues, reducing operating costs, reducing working capital requirements and decreasing capital expenditures. There's little news to explain the recent rally in AZPN but the company does have a unique product in a niche industry. Traders who favor the technical outlook for the company's stock can speculate on its future movement with this conservative position. APR 20.00 ZQP PD LB=0.35 OI=30 CB=19.65 DE=28 TY=5.7% ***** CBTS - Cubist Pharmaceuticals $20.63 *** New Drug! *** Cubist Pharmaceuticals (NASDAQ:CBST) is a worldwide, specialty pharmaceutical company focused on the research, development and commercialization of novel antimicrobial drugs to combat serious and life-threatening bacterial and fungal infections. Cidecin (daptomycin for injection), the company's lead product candidate and the first in a new class of antimicrobial drug candidates, called lipopeptides, has demonstrated the ability, in vitro, to rapidly kill virtually all clinically significant Gram-positive bacteria, including those that have become resistant to current therapies. Cubist expanded its product pipeline by announcing the development of an oral formulation of daptomycin, and by acquiring the worldwide rights to research, develop, manufacture and sell oral ceftriaxone, an orally active version of Rocephin, which is an intravenous antibiotic. Cubist recently announced it will seek U.S. approval this year for its antibiotic Cidecin, which treats complicated skin and soft tissue infections. The company's share value soared on the news but option traders can establish a lower cost basis in the issue with this position. APR 17.50 UTU PW LB=0.55 OI=91 CB=16.95 DE=28 TY=10.5% ***** DCTM - Documentum $25.50 *** A Big Day! *** Documentum (NASDAQ:DCTM) develops, markets and supports an open, flexible, Internet-scalable content management platform that enables companies to create, deliver, publish and personalize content in various formats across e-business applications. The company shipped the 1st commercial version of its Documentum Server product in late 1992, and since then, substantially all of its revenue has been from licenses of its family of Internet- scale content management system products and related services, which include maintenance and support, training and consulting services. In January, Documentum beat expectations, posting a fourth-quarter loss and said it expects to return to operating profits by the 2nd-quarter of 2002. Then Merrill Lynch raised its long-term rating on the company to a "strong buy," saying changes in Documentum's sales organization are a significantly positive. Recently, Deutsche Banc Alex. Brown started coverage on DCTM with a "buy" rating and a 12-month price target of $28. On Friday, the issue soared amid speculation it will gain sales from increased government spending. Our conservative position offers a way to profit from future bullish movement in the issue. APR 22.50 QDC PX LB=0.60 OI=4 CB=21.90 DE=28 TY=8.4% ***** FMKT - FreeMarkets $27.66 *** B2B Commerce Enabler! *** FreeMarkets (NASDAQ:FMKT) creates business-to-business online auctions and provides electronic commerce technology and services to buyers of industrial parts, raw materials, commodities and services. The company has created over 16,600 online auctions and their online markets help buyers of direct materials, as well as indirect materials and services, obtain lower prices and make better purchasing decisions. In a FreeMarkets online market, suppliers from around the world can submit bids in a real-time, interactive competition. FreeMarkets' FullSource solution helps the customer identify and screen suppliers, and also assembles a request for quotation that provides detailed, clear and consistent information for suppliers to use as a basis for their competitive bids. The company's QuickSource solution enables customers to use its technology to run their own online markets. FreeMarkets also operates the FreeMarkets Asset Exchange for buyers and sellers of surplus assets and inventory. FMKT traded at a new 52-week high Friday and the volume supported rally appears to have additional upside potential. APR 22.50 FAQ PX LB=0.30 OI=191 CB=22.20 DE=28 TY=5.3% ***** GNTA - Genta $18.05 *** Buying Biotech! *** Genta (NASDAQ:GNTA) is a biopharmaceutical company whose research efforts are focused on the development of new biopharmaceutical products for the treatment of patients with cancer. The company's research portfolio is currently divided into four areas including the Antisense Program, which involves the administration of unique synthetic oligonucleotides that are complementary to specific mRNA transcripts; the Gallium Products Franchise, which is a complex, bone-seeking element that exerts potent effects on the skeletal system; Androgenics Compounds, which are products comprised of a portfolio of small molecules that are useful for the treatment of prostate cancer; and Decoy Aptamers, which employ oligonucleotides to bind to specific proteins known as transcription factors. The company is in the late stages of testing an experimental treatment for cancer called Genasense and analyst Mark Monane at Needham & Co. recently reiterated his "strong buy" rating on Genta's stock. This position offers a method to speculate on the near-term performance of the issue in a conservative manner. APR 15.00 GJU PC LB=0.40 OI=1211 CB=14.60 DE=28 TY=9.5% ***** SKX - Skechers U.S.A. $19.20 *** Upgrade = Rally! *** Skechers U.S.A. (NYSE:SKX) designs and markets branded contemporary casual, active, rugged and lifestyle footwear for men, women and children. The company, through its international distributors, sells its products in over 100 countries and territories. Skechers offers footwear in a broad range of styles, fabrics and colors. The company categorizes its footwear into six product lines: Skechers USA, Skechers Sport, Skechers Collection, Skechers Kids, Somethin' Else from Skechers and Skechers by Michelle K. These broad product lines are offered in varying styles for men, women and children; however, the Skechers Collection is offered in men's styles only, and Somethin' Else from Skechers and Skechers by Michelle K are only offered in women's styles. Skechers was the target of a new upgrade Friday by BB&T Capital Markets and the announcement drove the stock over 10% higher on heavy volume. Rather than chase the rally with a stock purchase, traders can profit from continued upside movement with this conservative option position. APR 17.50 SKX PW LB=0.30 OI=57 CB=17.20 DE=28 TY=5.2% ***** SNDK - Sandisk $21.10 *** Memory For All Your Toys! *** SanDisk Corporation (NASDAQ:SNDK) designs, manufactures, and sells flash memory storage products that are used in a wide variety of electronic systems. The company has designed its flash memory storage solutions to address the storage requirements of emerging applications in the electronics, industrial, and communications markets. The company's products are used in a number of rapidly growing consumer electronics applications, such as digital cameras, personal digital assistants, portable digital music players, digital video recorders and smart phones, as well as in industrial and communications applications, such as communications routers and switches and wireless communications base stations. The company's products include removable CompactFlash cards, MultiMediaCards, FlashDisk cards and Secure Digital Cards and embedded FlashDrives and Flash ChipSets with storage capacities ranging from 8 megabytes to 1.2 gigabytes. Sandisk is the industry leader among makers of memory for consumer electronics and the company's share value has rebounded since early March in the wake of an upgrade from Morgan Stanley. Investors who wouldn't mind owning the issue can profit from its future bullish activity with this position. APR 17.50 SWQ PW LB=0.25 OI=360 CB=17.25 DE=28 TY=5.3% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield JDEC 18.21 APR 17.50 QJD PW 0.85 100 16.65 28 12.4% CANI 8.61 APR 7.50 CDU PU 0.30 26 7.20 28 12.4% ENTG 15.01 APR 15.00 UFN PC 0.75 34 14.25 28 12.1% CPN 13.91 APR 12.50 CPN PV 0.50 16211 12.00 28 11.7% FFIV 26.07 APR 22.50 FLK PX 0.65 666 21.85 28 9.4% WSTC 30.55 APR 30.00 HUD PF 0.95 13 29.05 28 8.2% MCAF 19.25 APR 17.50 CFU PW 0.40 101 17.10 28 6.8% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ An Undertow In The Changing Tide By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, March 22 U.S. stocks closed lower today with blue-chip shares leading the retreat as concerns about corporate profits weighed heavily on investors. The Dow industrials lost 52 points to finish at 10,427, despite a brief surge into positive territory during the session. The biggest downside activity was seen in shares of Boeing (NYSE:BA) McDonald's (NYSE:MCD), Intel (NASDAQ:INTC), International Paper (NYSE:IP) and Hewlett-Packard (NYSE:HWP). Traders have focused intently on any news concerning corporate profits and the report from McDonald's was not what they wanted to hear. McDonald's warned analysts that its first-quarter profits would likely be slightly below current views and that its 2002 earnings would be toward the lower end of a previously announced range. Investors also reacted negatively to suggestions of lackluster sales at a unit of Hewlett-Packard. Ann Livermore, head of HP's services group, reportedly sent a memo to her managers earlier this week alerting them that the unit's revenue and profit were running "well below plan" so far this quarter. The announcement did not help HP's flagging share value and the effects spread to other companies in the computer hardware sector. By the end of the day, the NASDAQ Composite Index had slipped 17 points to 1,851, with software and chip sectors taking the biggest blows. In the broader market, weakness came from biotechnology, defense, and paper issues while pockets of limited buying pressure were seen in airline, banking and major drug shares. Stocks in the energy segment were also under pressure amid growing pessimism about the sector's earnings prospects but the recent earnings jitters boosted the precious-metals industry, which is often seen as a defensive group. Overall, the Standard & Poor's 500-stock index lost 4 points to close at 1,148. Trading volume came in at 1.23 billion on the NYSE and at 1.50 billion on the NASDAQ. Breadth was negative, with decliners outpacing advancers by 18 to 13 on the Big Board and 20 to 15 on the technology exchange. On the fund flow front, Trim Tabs reported that all equity funds got an inflow of $4.4 billion during the week ending March 20, compared with inflows of $7.6 billion during the prior week. Last week's new plays (positions/opening prices/strategy): Best Buy (NYSE:BBY) APR65P/70P $0.60 credit bull-put Cardinal (NYSE:CAH) APR60P/65P $0.60 credit bull-put Idec Pharma (NSDQ:IDPH) APR85C/80C $0.50 credit bear-call XM Satellite (NSDQ:XMSR) APR17C/12P $0.05 credit synthetic Abercrombie (NYSE:ANF) MAY30C/30P $4.40 debit straddle Veeco (NYSE:VECO) APR30C/30P $4.30 debit straddle Our speculative position in Satellite Radio Holdings provided some excitement this week as the issue fell unexpectedly after the company's auditor questioned XM's ability to continue as a going concern. The company's chairman, Gary Parsons, quickly responded, saying the auditor has raised the "going concern" issue every quarter since the company has gone public. He also noted that the company is "very comfortable with its ability to continue to fund its business in the normal course." Regardless of the company's ability to fund its business, investors now have something to worry about so it is unlikely the issue will recover in the near-term. On a more positive note, all of our new credit spreads are off to a good start and the volatility in the market allowed some traders to achieve higher premiums than we observed (on a simultaneous order basis). The Reader's Request debit straddle in Veeco was also active this week while our conservative "probability play" in Abercrombie has yet to make a significant move. Portfolio Activity: Stocks traded in a big range this week as investors sparred with market bears for control of equity values in the near-term. The outlook for the economy has improved during the past few months but concern still exists over the future of corporate profits and analysts are hinting that second quarter earnings results will be less than favorable. As if that wasn't enough, worries that the Federal Reserve will start raising interest-rates later this year to ward off inflation are starting to emerge in the bond market and that doesn't bode well for stocks in the coming months. One company that may benefit from a rising interest-rate scenario is Providian Financial (NYSE:PVN) and the issue soared this week on news the credit card issuer had settled a lawsuit over allegedly excessive fees and was the target of an upgrade. Providian said it would pay $38 million to settle a class-action lawsuit filed by shareholders that claimed the company inflated its profits by gouging its customers in the late 1990s. Estimates on damages during the period ran as high as $400 million, so a penalty of only $38 million is very favorable and Providian doesn't expect the settlement to hurt its turnaround effort because the payment is covered by insurance. Our bullish position in the issue was speculative but the original spread (JUN 5C/7.5C) has already produced a profit of over 150%. Another positive outcome from this week's volatile trading activity was the success of our new debit straddle in Fomento Economico Mex (NYSE:FMX). Today, the (APR40C/40P) position offered a closing credit of $6.50 on $3.90 invested in less than one month. In the time-selling category, Pactiv (NYSE:PTV) is trading exactly where we want it for the April expiration and the brief rally in Dupont (NYSE:DD) offered a 25% "early-exit" profit for traders who chose to lock-in gains prior to the retreat in Dow stocks. One position that deserves honorable mention is the bullish "synthetic" in St. Jude Medical (NYSE:STJ) as the underlying issue traded near an all-time high Wednesday before succumbing to selling pressure in the broader market. With three weeks left until expiration, there is still time for the speculative position to achieve an additional gain but regardless of the outcome, it appears the sold (short) put will remain profitable. Questions & comments on spreads/combos to Contact Support ****************************************************************** - STRADDLES AND STRANGLES - With the continued decreased in implied volatility, the number of stocks with cheap options has climbed to historically high levels. However, many stocks remain very active thus it is a good time to buy straddles. All of these issues meet the basic criteria for a favorable straddle: inexpensive premiums, a history of adequate price movement and the potential for volatility in the stock or its industry. This simple selection process provides the best combination of low risk and potentially high reward but, as with any candidates, they must be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** CVS - CVS Corporation $34.38 *** Recent Volatility! *** CVS Corporation (NYSE:CVS) is principally engaged in the retail drugstore business. The company operates over 4,000 retail and specialty pharmacy drugstores and various mail-order facilities located in 31 states and the District of Columbia. During the past year, the company dispensed over 300 million prescriptions. The company's operations are grouped into four businesses, Retail Pharmacy, Pharmacy Benefit Management, Specialty Pharmacy and Internet Pharmacy. PLAY (conservative - neutral/debit straddle): BUY CALL MAY-35 CVS-EG OI=961 A=$1.55 BUY PUT MAY-35 CVS-QG OI=195 A=$2.15 INITIAL NET DEBIT TARGET=$3.50-$3.60 TARGET PROFIT=25-40% ****************************************************************** JPM - J. P. Morgan Chase $35.20 *** Never A Dull Moment! *** J. P. Morgan Chase (NYSE:JPM) is a global financial services firm with operations in over 60 countries. The company's principal bank subsidiaries are The Chase Manhattan Bank, Morgan Guaranty Trust Company and Chase Manhattan Bank USA, National Association. Its principal non-bank subsidiaries are Chase Securities (CSI) and J.P. Morgan Securities Inc. (JPMSI). The bank and non-bank subsidiaries of J.P. Morgan Chase operate nationally, as well as through overseas branches and subsidiaries, representative offices and affiliated banks. J.P. Morgan Chase's global activities are internally organized into these business franchises (Investment Bank, Investment Management/Private Banking, Treasury & Securities Services, JPMorgan Partners and Retail & Middle Market Financial Services). Last year, the company merged its two lead banks, The Chase Manhattan Bank and The Morgan Guaranty Trust Company of New York. The name of the merged bank is J.P. Morgan Chase Bank. PLAY (conservative - neutral/debit straddle): BUY CALL MAY-35 JPM-EG OI=1431 A=$1.75 BUY PUT MAY-35 JPM-QG OI=327 A=$1.80 INITIAL NET DEBIT TARGET=$3.25-$3.45 TARGET PROFIT=25-40% ****************************************************************** VIA - Viacom $50.30 *** Probability Play! *** Viacom (NYSE:VIA) is a leading global media company, with many preeminent positions in broadcast and cable television, radio, outdoor advertising, and online. With programming that appeals to audiences in every demographic category across virtually all media, the company is a leader in the creation, promotion, and distribution of entertainment, news, sports, and music. Viacom’s well-known brands include CBS, MTV, Nickelodeon, BET, Paramount Pictures, VH1, Viacom Outdoor, Infinity, UPN, TNN: The National Network, CMT: Country Music Television, Showtime, Blockbuster, and Simon & Schuster. PLAY (conservative - neutral/debit straddle): BUY CALL MAY-50 VIA-EJ OI=751 A=$2.80 BUY PUT MAY-50 VIA-QJ OI=348 A=$2.35 INITIAL NET DEBIT TARGET=$5.00-$5.10 TARGET PROFIT=25-50% ****************************************************************** - INDEX OPTION SPREADS & STRADDLES - ****************************************************************** QQQ - Nasdaq-100 Trust Series $36.68 *** Trade The NASDAQ! *** The Nasdaq-100 Trust Series I is a pooled investment designed to provide investment results that generally correspond to the price and yield performance of the Nasdaq-100 Index. With Nasdaq-100 Index Tracking Stock, you can buy or sell shares in the collective performance of the Nasdaq-100 Index and the transaction gives you ownership in the 100 stocks of the Nasdaq-100 Index. When you purchase Nasdaq-100 Index Tracking Stock, you're investing in the Nasdaq-100 Trust, a unit investment trust that holds shares of the companies in the Nasdaq-100 Index. The Trust is designed to track the price and yield performance of the Index, thus you can expect your Nasdaq-100 Index Tracking Stock to move up or down in value when the Index moves up or down. As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific industry group or on the market as a whole. Traders who think the volatility in technology stocks will continue this month as the quarterly earnings season begins can attempt to profit from that activity with this neutral-outlook position. PLAY (speculative - neutral/debit straddle): BUY CALL APR-37 QQQ-DK OI=50817 A=$1.20 BUY PUT APR-37 QQQ-PK OI=46291 A=$1.50 INITIAL NET DEBIT TARGET=$2.50-$2.60 TARGET PROFIT=15-20% ****************************************************************** OEX - S&P 100 Index $580.90 *** OTM Credit-Spreads *** The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. Traders who participate in OTM credit-spreads often utilize S&P 100 (OEX) options because they generally contain more premium than options on individual stocks and also provide an underlying instrument less prone to huge, gapping moves. This position will profit if the underlying remains below the sold strike (at 610) and from a technical viewpoint, the overall market seems likely to drift lower as the near-term earnings outlook is uncertain. Review the OIN's Market Sentiment section for specific technical information on the current trends in equities. PLAY (conservative - bearish/credit spread): BUY CALL APR-615 OEY-DC OI=1883 A=$1.00 SELL CALL APR-610 OEY-DB OI=2473 B=$1.60 NET CREDIT TARGET=$0.70-$0.75 PROFIT(max)=15% ***************************************************************** - COMBINATION PLAYS - ****************************************************************** UCI - UICI $16.72 *** Time-Selling Play! *** UICI (NYSE:UCI) offers primary health and life insurance and selected financial services to niche consumer and institutional markets. The company issues health insurance policies, covering individuals and families, to the self-employed, association group and student markets. The company offers a broad range of health insurance products for self-employed individuals and individuals who work for small businesses. UICI's catastrophic hospital and basic hospital-medical expense plans are designed to accommodate individual needs, and include both traditional fee-for-service indemnity plans and managed care options, such as a preferred provider organization plan, as well as other supplemental types of coverage. For the student market, UICI offers tailored health insurance programs that generally provide single-school-year coverage to individual students at colleges and universities. One of our readers asked for another low-cost calendar spread and UIC is a good candidate for the bullish version of the popular time-selling strategy, based on the recent technical indications and favorable option premiums. In this case, the underlying issue is below the strike price of the options, providing a speculative position with low initial cost and large potential profits. Two positive outcomes can occur: the stock climbs to sold strike in the near-term and the position is closed for a profit when the time value erosion in the sold option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long options' strike price, thus producing a positive return. Of course, the cost basis of the long option can be reduced through the sale of additional calls prior to its expiration in November. PLAY (speculative - bullish/calendar spread): BUY CALL NOV-17.50 UCI-KW OI=40 A=$2.00 SELL CALL APR-17.50 UCI-DW OI=60 B=$0.35 INITIAL NET DEBIT TARGET=$1.50-$1.55 TARGET PROFIT=50% ****************************************************************** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ We're sticking with what's been working. A strong health care and weak financial stock make their way onto the list To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/032402.asp ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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